M&S shares tumble as Ocado deal spooks City
High Street chain taps investors for £600m and cuts dividend to fund £750m delivery tie-up
MARKS & Spencer’s shares plunged after shareholders were spooked by its ‘extravagant’ delivery tie-up with Ocado.
In its biggest-ever deal, M&S has agreed to pay £750m for half of Ocado’s retail division, valuing the entire business at £1.5bn.
The partnership will allow M&S to deliver groceries to customers for the first time in its 135-year history.
But the terms of the venture sent shockwaves through the City.
In a sign that investors believe Ocado got the better of the deal, its shares rose 2.9pc while M&S fell 12.5pc, wiping more than £600m off its value.
Neil Wilson, analyst at trading platform Markets, said: ‘M&S’s purchase of Ocado’s UK retail business looks rather like one of its own ready meals – expensive, not very good for you but easy, quick and ready to heat up.’
M&S is now preparing to tap shareholders for £600m – its first rights issue – to fund the deal, which still needs to be signed off by Ocado shareholders.
It will also slash its full-year dividend by 40pc to 7.1p per share, the first time it has been cut in a decade.
By contrast, Ocado is being handed £750m to plough into the flourishing technology business behind its robot powered warehouses.
Paul Mumford, a fund manager at Cavendish Asset Management, which owns shares in M&S, added: ‘Compared to Sainsbury’s and Tesco, M&S clearly can’t compete when it comes to customers’ weekly shops.
‘And whichever way you look at it, raising £600m to invest in a joint venture which may or may not work seems an extravagant use of shareholders’ money.’
But M&S chief executive Steve Rowe insisted the deal was positive for all. ‘This is not a gamble,’ he said. ‘The point that people are missing is this is not just the money that’s going on the joint venture. That’s one element of it.
‘The £70m a year, at least, that we will make in the M&S business through synergies and efficiencies is substantive and does add shareholder value.
‘The share price [reaction] has been in response, as much as anything, to the fact there is a rights issue and a movement down in the dividend. This is really the only way M&S could have moved food online.’ M&S is fighting to grow sales and profits as more customers go online.
It wants a third of its business to be online within three or four years and to revive ailing sales after a dismal Christmas. At least 100 M&S stores are being axed as it races to turn around its disappointing performance.
Tim Steiner, chief executive of Ocado, suggested the deal could increase the number of M&S shops. It is the first major transaction to be signed off by M&S under the leadership of Rowe and chairman Archie Norman.
Despite talks between M&S and Ocado going back as far as 2000, Rowe denied that he had wasted time. ‘I have always said we will not go online if it was unprofitable to do so and destroyed shareholder value,’ he said.
‘I’ve been trying to find the right way to do it to enhance shareholder value.
‘I believe the joint venture with Ocado is a long-term proposition, is transformational and does add shareholder value.
‘I prefer to be criticised for not being robust in my decision-making, rather than it be said I dillydallied. I don’t think I dilly-dallied.’