Big cost of M&S deal with Ocado

Value slashed £600m but boss confident

MARKS & Spencer was yesterday accused of striking a “desperate” deal by paying up to £750million for a tie-up with internet grocer Ocado.

The high-street giant is buying half of Ocado’s retail arm so it can begin selling food online.

M&S boss Steve Rowe called it “transformational” and “the biggest deal M&S has ever done”.

But £600m was wiped off M&S’s value as investors were asked to stump up £600m, while seeing their dividend slashed by 40%.

The joint venture marks M&S’s belated bid to break into the booming online grocery market.

M&S will replace rival Waitrose, which has supplied Ocado with products for two decades, from next year.

Rowe said launching its own online grocery business wasn’t viable because of its small average “basket size”. Ocado’s, on the other hand, is worth more than £100, and it will stock more than 50,000 products.

The tie-up gives M&S access to Ocado’s 700,000-plus customers, although experts questioned how many might switch to Waitrose.

M&S is buying hardly any Ocado assets, such as its hi-tech depots. Those remain with the rest of Ocado, which will earn fees for providing services.

The deal, sealed at 6am yesterday, will see M&S pay an initial £562m, with the rest in five years if it all goes well. M&S said it would lead to at least £70m in cost savings.

Ocado products will also be sold in M&S stores.

Rowe said: “We think we have paid a fair price.”

Ocado boss Tim Steiner said: “It is a fantastic deal for all parties.”

Peel Hunt was among brokers to give the deal the thumbs-up.

But Patrick O’Brien, of research firm GlobalData, said: “Ocado’s deal with M&S shows how desperate the latter was to be able to get into food online.”

The 12% slump in M&S’s shares left the retailer, founded in 1884, worth £4.3bn.

That’s much less than Ocado’s £7bn after shares in the firm, only set up in 2000, jumped 3%.