Marks & Spencer is to launch a £600m cash call on its shareholders in order to bring its ready meals and other food hall favourites to internet shoppers for the first time in a £1.5bn deal with the online delivery firm Ocado.
M&S will pay Ocado £750m for a 50% share of the new Ocado.com joint-venture, which will begin trading in September 2020, when Ocado’s deal to supply Waitrose products expires.
Steve Rowe, Marks & Spencer’s chief executive, said he had “always believed that M&S food could and should be online” and combining M&S’s upmarket food range with Ocado’s technology and delivery network was a “win-win” deal that would “drive long-term growth”.
However, M&S shares fell by 12% as investors and analysts raised concerns that the 134-year-old high street retailer had overpaid for access to Ocado’s technology and delivery network. The plunge in M&S’s share price – the biggest one-day fall since 2016 – wiped more than £550m off the retailer’s market value. Ocado’s shares rose by 3%.
Rowe rejected suggestions that M&S had paid too much to get into the growing internet grocery business. “We think we’re paying a fair price and I think Ocado do too,” he told reporters on Wednesday.
Tim Steiner, the founder and chief executive of Ocado, said: “I think Steve and his team have taken an incredibly smart risk today. It’s not like going to a casino and laying down a chip. You’ve got to take calculated risks where your upside is enormous, your downside is minimal and your investment to do it is sensible.”
Rowe said he had expected M&S shares to fall as the company announced a £600m rights issue – together with a surprise 40% cut in its dividend payout – in order to fund the deal. “This is not about the short term,” he said. “This is about the transformation of Marks & Spencer [and] the transformation of online grocery shopping in the UK.”
He said partnering with Ocado was the only way to bring M&S food to more shoppers, because its range of products was too small for consumers to do a whole weekly shop directly with M&S. The average M&S shopper spends £13 on each shop, compared with average shopping bills of more than £100 at Ocado. Rowe said the partnership “enables us to take our food online in an immediately profitable, scalable and sustainable way”.
However, some M&S investors questioned the wisdom of the deal. Paul Mumford, investment manager at Cavendish Asset Management, which owns a small stake in M&S, said: “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.”
Analysts also raised concerns about the price paid by M&S. Neil Wilson, the chief market analyst at Markets.com, 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.”
Nick Bubb, an independent retail analyst, described the deal as “very puzzling” and a “huge leap in the dark” for M&S. “It may be understandable that Ocado wanted to ditch Waitrose but it is hard to understand why M&S want to buy into the existing Ocado distribution infrastructure (which services Morrisons etc), at a cost of at least £750m, rather than just become a new partner.”
Richard Chamberlain, an analyst at RBC Europe, said. “We think [M&S] is paying a high price which reflects it being very late to the [online] party.”
Steiner described the deal, which was signed at 6.05am on Wednesday, as a “transformative moment in the UK retail sector” that would combine “two iconic and much-loved retail brands set to provide an unrivalled online grocery offer”.
He said the joint-venture would allow Ocado to “grow faster, add more jobs, and create more value”.
Rob Collins, the managing director of Waitrose, said he was confident that shoppers who use Ocado to buy Waitrose goods would migrate to Waitrose.com.
