November 19, 2012 6:19 pm

Ocado pressures remain despite bank deal

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Ocado has struck a deal with its banks to ensure its survival – for now. But the £36m capital raising and new banking facilities do not eradicate longer-term financial and competitive pressures on the online grocer, which has been dogged by difficulties since its £800m float two-and-a-half years ago.

“It’s a postponement rather than a solution,” says Philip Dorgan, analyst at Panmure Gordon and a long-time critic of Ocado, which sells Waitrose food online.

Ocado – which was feared to be in danger of breaching its banking covenants at its year-end in just over a week’s time – has reached agreement with Barclays, HSBC and Lloyds to extend its £100m capital expenditure facility until July 2015.

In addition, it will raise £35.8m from existing investors.

Duncan Tatton-Brown, finance director, says this will provide more than a year’s breathing space, enabling Ocado to open its second warehouse in Dordon, Warwickshire.

“We would want to refinance in normal circumstances in the middle of 2014,” he adds. “That is more than a year after we would have expected to open our second fulfilment centre.

“Based on current market estimates from analysts, our earnings before interest, tax, depreciation and amortisation generation will be in the mid-50s [millions of pounds]. The financing options of the company will be better than they are now.”

Options at that point include tapping the bond market. Alternatively, it could look at a sale-and-leaseback deal involving the second warehouse, mooted as a possibility this time round.

“We can consider that, and would consider that if that is in the best interests of the company,” he says.

But investors could be forgiven for scepticism, given that Ocado has delivered a string of disappointments since its 180p per share float in July 2010. The shares traded as low as 52p last December after Ocado warned on profits.

“Its clear the business would have preferred to have grown faster and [to have] made less mistakes,” says Mr Tatton-Brown. “To say that the business is not progressing . . . is just factually wrong.”

Some bankers and analysts still believe Ocado will ultimately sell itself to a rival retailer or online operator.

Marks and Spencer and Wm Morrison have long been touted as potential bidders, as neither has an online food business. Some bankers and analysts believe it could appeal to J Sainsbury, although people close to Sainsbury insist this is not the case.

Any buyer would have to pay a £40m penalty to Waitrose in the event of a takeover to terminate the distribution contract, although a new owner would also have access to Ocado’s tax losses of about £100m.

Waitrose is also regarded as a natural owner of Ocado, but it is building its own online business in competition with the online grocer instead.

“It is not an option we have been looking at,” insists Mr Tatton-Brown. “Any company that is publicly traded, people can make an offer for that company.

“We are like any other public company. Anybody can buy shares in us, and if they pay the right price, they can buy all the shares in the company.”

Ocado also continues to face competitive pressures, not only from Waitrose, which is expanding its stand-alone online grocery business, but from the other big supermarket chains.

Sainsbury and Asda recently indicated that they were increasing their online grocery sales strongly.

Tesco plans to open scores of so-called “dark stores” – in effect, stores without customers, dedicated to fulfilling online grocery orders – while Asda is enabling customers to pick up their online shopping from stores, petrol stations and business parks.

Wm Morrison, meanwhile, is set to begin trialling an online grocery service next year.

In the 14 weeks to November 11, Ocado’s sales rose 11 per cent year-on-year, although this rate improved in the six weeks to November 11 to 13.7 per cent year-on-year.

The opening of Ocado’s second warehouse is due in February. The company says the project remains on time and in line with budget.

One person with knowledge of the company says: “The acid test for Ocado is when they open the 180,000-order capacity warehouse and try to fill it.

“That will either say there is huge demand and capacity for this, and they were right all along. Or maybe not, and therefore they will have built something that is too big and is going to drag them down.”

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