January 22, 2013 7:56 pm

Rose seen as dealmaker for online grocer

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A driver checks his load before leaving to deliver orders at an Ocado distribution center©Bloomberg

One conclusion being drawn from Sir Stuart Rose’s return to City life as chairman of Ocado is that he would ready the lossmaking online grocer for sale, possibly to his former employer Marks and Spencer.

Shares in Ocado rose more than 6 per cent on Tuesday, to over 100p, their highest level for more than six months. This followed a more than 9 per cent gain on Monday, when they were driven higher by takeover rumours, also centred on M&S.

One person with knowledge of the business predicts that Sir Stuart will either improve Ocado, or smooth a deal to sell it, given his extensive contacts in the industry.

“He knows everyone in the business,” the person says . “He’s on first name terms with everyone”.

Sir Stuart looked at buying Ocado when he was at the helm of M&S, according to people familiar with the situation. However, a deal never came to fruition. M&S does not have an online grocery business, making Ocado a potentially useful bolt-on.

However, one banker was sceptical that Marc Bolland, chief executive of M&S, would be prepared to strike a big deal at the moment. He is under pressure from some shareholders over the performance of the clothing business, and the banker suggested that acquiring a lossmaking business would not be the best solution.

And people close to M&S also played down the prospects of a deal.

Wm Morrison is also seen as one potential acquirer of Ocado, given that it needs to move into online groceries – and fast – after it blamed its lack of an online presence for its poor Christmas trading. However, people close to Morrisons have also played down the company’s interest in a deal.

J Sainsbury is also expanding its online grocery business, and would be unlikely to stand on the sidelines if Ocado came into play.

Then there is Waitrose, which has a supply agreement with Ocado. Its online business is powering ahead and needs to expand capacity. Waitrose would also be in a strong position as, under the terms of its agreement, it would not have to pay a £40m poison pill if it acquires Ocado.

According to Ocado’s prospectus, the agreement with Waitrose can be terminated if a rival acquires 50 per cent of the shares in Ocado, or control of the board. The party acquiring Ocado must then pay Waitrose the lower of £40m or 4 per cent of the purchase price.

Duncan Tatton-Brown, finance director of Ocado, insists the appointment of Sir Stuart is not a prelude to a deal. “Its completely independent of that,” he says.

Some Ocado followers believe the addition of Sir Stuart to the Ocado board could help smooth the way to a new supply contract with M&S if the Waitrose deal were to end.

“It’s an inbuilt option,” says the person with knowledge of Ocado.

The contract with Waitrose runs to 2020, with a break clause in 2017. “It’s quite some way out,” says Mr Tatton-Brown. “Who knows what the circumstances will be in 2017?”

Not all analysts are convinced Sir Stuart’s appointment will pave the way to a deal.

“Certainly around the flotation period, and then with the collapse in Ocado’s share price, most potential suitors of this business would have run the slide-rule over it. Most have done so and have come away thinking that the business does not deliver incremental returns,” says Clive Black, analyst at Shore Capital, and a longstanding critic of Ocado.

In the meantime, Ocado must deal with increasing online competition from Tesco, Asda and Sainsbury, while Morrison is expected to trial an online grocery business in London later this year.

Another test for Ocado will be the opening in the first quarter of this year of its second distribution centre, in Dordon, Warwickshire. This will be crucial to drive sales to a level where supporters of the business say economies of scale from Ocado’s state of the art technology will kick in.

Mr Tatton-Brown says Ocado remains on track to open the new warehouse in the next three months.

Sir Stuart irritated some investors during his time at M&S by holding the roles of both chairman and chief executive, in contravention of corporate governance best practice.

But last night, investors appeared to be giving Ocado – and its new chairman – the benefit of the doubt.

Tom Ewing, portfolio manager of Fidelity UK Growth fund, Ocado’s fourth-biggest shareholder, with almost 10 per cent, said: “The appointment of Sir Stuart Rose as chairman [at Ocado] is encouraging. It boosts the retail experience at the top of Ocado while demonstrating that key participants in the industry are waking up to the fact that people increasingly, and inexorably, want to shop for their food online.”

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