This is not just a rights issue, this is an M&S ri . . . Actually, no. The £600m equity fundraising Marks and Spencer is serving up to fund a delivery venture with Ocado is nothing like the sauce-drizzled, compote-infested foodstuffs in its self-parodying adverts. M&S’s results show that this food was sold with fewer promotional discounts last year, cutting like-for-like sales by 2.3 per cent. But the 325m new shares in its 1-for-5 rights issue are being offered at just 185p, which is a 28 per cent discount to the theoretical ex-rights price. So this is not an M&S rights issue. It is more like a Lidl rights issue.
M&S has to price the new shares at a sizeable discount to ensure there is still some upside for investors after predictable falls in its market price. News of the fundraising alongside a 3 per cent decline in group revenues, as clothing and home like-for-likes also fell 1.6 per cent, was met with a 7 per cent drop in M&S’s shares. That was on top of a 10 per cent price fall in the past year, and a halving in the past five.
M&S also has to offer a discount to gain buy-in to its strategy as financial performance looks likely to get worse before it gets better. Its own guidance for the financial year 2020 admits a now-accelerated store closure programme cannot be offset by new food and full-line stores: this will cut food sales by another 1 per cent and clothing and home sales by another 3 per cent next year. Gross margins on these sales could fall 25 basis points, or rise 25bp, depending on investment needs. But analysts think the risk is to the downside. Liberum says that, in clothing, M&S will continue to be squeezed by fast fashion, online, brands and value retailers. RBC warns that, in food, M&S will continue to underperform while it improves its ranges and tries to change perceptions about value for money.
Meanwhile, optimising the performance of stores and online will require another £350m-£400m of capital expenditure and more “exceptional” costs — in the past three years, these have totalled £1.4bn which, Liberum points out, is a third of the current market capitalisation.
And M&S has to offer a discount to reflect the time value of the new money — as there is unlikely to be a return on it in the short term. That £600m will be used to fund the upfront £562.5m to buy into the Ocado joint venture, but this will not deliver an M&S profiterole let alone a profit for some time. Synergies are expected from increased buying scale, joint marketing and innovation but the execution will be complex and risky. M&S is not a conventional supermarket like Ocado’s former partner Waitrose, and Waitrose is now expanding its own rival service. M&S’s Ocado venture, argues Liberum, “may not be accretive for a number of years”.
Of course, a discounted rights issue to fund a big acquisition is not unusual — and M&S’s discount is actually less than the 35 per cent offered by Restaurant Group to raise £315m to buy Wagamama, and the 34 per cent offered by Cineworld when raising £1.7bn for Regal. Ultimately, it may fund a deal that turns M&S into a premium online food retailer, offering a compote of lower costs, less debt and higher profit.
For now, though, this is not just jam. This is M&S jam. Jam tomorrow. For which you must pay today.
Purplebricks: offers over
Just as purple is opposite yellow on the colour wheel, Purplebricks is on the opposite path to rival estate agents Foxtons and Countrywide, writes Kate Burgess. They followed a yellow brick road from private equity to the public markets. Purplebricks may be going the other way. Buyout firms have been spotted circling the online house seller after it admitted messing up its US and Australian expansion. Its shares, from highs above 400p in 2018, are now 95p.
Purplebricks’ profitable UK business is likely to have most appeal. Revenues are growing despite the housing market slowing. And it is one up on traditional agents with their expensive shops and payrolls of Tim Nice-But-Dims. Low costs and ancillary revenues — from conveyancing and mortgage referrals — deliver double-digit earnings margins.
Risks, though, are threefold. First, ancillary fees are cut by a government seeking transparency. Second, online agents’ market share stalls above 7 per cent, as Berenberg thinks it might. Third, vendors stop signing up, fearing Purplebricks can only catalogue houses, not sell them. Berenberg reckons it currently sells nearly two-thirds of properties listed. That is close to industry levels. But the slowing growth of listings is worrying.
Buyout firms may set out on the Purplebrick road; they may not follow it all the way to Kansas.
Royal Mail: wait a second
Remember the second post? Well, after 16 years, Royal Mail is bringing it back — for parcels. It is being made possible by a £1.8bn investment in automation to improve productivity by 2 per cent a year. At present, most parcels are hand sorted just like they were in 1883, and in the first half of last year productivity fell 0.2 per cent. Investors decided this second post brought better news than early analyst notes about a dividend cut. But the post they should have looked out for was on Twitter, from the CWU union. It said it looked forward to negotiating “in a way that honours our heritage”. There may be a longer wait for deliverance from the 19th century.
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