Marks & Spencer is thrashing out the terms of a £1.8bn tie-up with Ocado to belatedly launch a grocery delivery service, replacing the online firm’s current deal with Waitrose.
Shares in both companies surged on Tuesday after they rushed out identical statements that confirmed they were in discussions over a deal in which M&S would buy a 50% stake in Ocado’s UK retail arm for up to £900m.
M&S will pay between £800m and £900m to enable it to make a late entry into the UK’s £11.4bn online grocery shopping market. The current Ocado/Waitrose service has a customer base of 720,000 shoppers and the ambition would be to convert as many as possible to a new M&S branded food offer.
News of a potential alliance leaked in January but neither business would comment on the reports. However, their hand was forced when fresh details of the plan emerged. At the top end the proposed deal, which could be finalised as soon as Wednesday, Ocado’s UK delivery business would be valued at up to £1.8bn.
After nearly a decade as an unloved listed company, Ocado enjoyed a second coming last year after plans to sell its grocery-picking technology to other retailers finally took off. A string of contract wins, including with US supermarket giant Kroger, helped the Ocado share price to double in 2018.
Ocado was the top riser on the FTSE 100 after the retailers confirmed talks, up 12% at 990p, giving the company a market value of £6.8bn. Shares in M&S rose 3% to 303p, valuing it at £4.9bn.
M&S declined to expand beyond its statement, which said: “Marks & Spencer confirms that it is in discussions with Ocado regarding a joint venture in UK retail. There is no certainty that these discussions will result in any agreement or as to the timing of any such agreement.”
Ocado has worked with Waitrose for 20 years but the supply deal between the companies ends in September 2020. Although Ocado already works with Morrisons, the terms of the Waitrose contract would not permit Ocado to work with M&S on the same basis, Ocado boss Tim Steiner confirmed to reporters earlier this month.
Ocado and M&S are thought to be trying to strike a deal before Friday, which is the deadline for Ocado to trigger an 18-month break clause with Waitrose.
M&S started experimenting with online food delivery in 2017, but its chief executive Steve Rowe has been reluctant to pour money into it at a time when sales in its clothing and food departments are falling. A report in London’s Evening Standard suggested M&S would need to do a cash call on investors to fund the deal.
Famous for inventing ready meals, M&S’s foodhalls are popular with small households and lazy chefs, so there are several hurdles to overcome if it is to become a destination for the weekly or monthly shop. Its food departments sell just 7,000 products, compared with 40,000 at most Tesco shops, with the average spend just £13, well below Ocado’s minimum order value of £40. The traditional focus is on exclusive own-brand products rather than the big name grocery brands.
Jefferies retail analyst James Grzinic said the proposed deal looked like a good one for Ocado but the runes were harder to read for M&S: “We would be wary of the ability for the M&S brand to support a basket size of the magnitude required to make the online economics work.”
The John Lewis Partnership, which owns Waitrose, was one of the early investors in Ocado but sold its holding for about £150m in 2011. During the past decade, the employee-owned retailer has been competing with Ocado via its own delivery service, Waitrose.com, which fills shoppers’ orders from its stores’ shelves, as well as a fulfilment centre in Coulsdon, south London. Waitrose.com covers 80% of UK postcodes.
Ocado suffered a setback three weeks ago when a huge fire – on the same day as the company’s annual results – destroyed its warehouse in Andover, Hampshire. After the fire, investors took fright, with more than £1bn wiped off the firm’s stock market value. However, the share price has been staging a recovery and is now close to pre-fire levels of about £10.
