LONDON (Reuters) – British retailer Marks & Spencer raise money from investors and cut the dividend for the financing of a joint venture with the online grocery pioneer Ocado that will give M&S a full online food delivery service for the first time.
FILE PHOTO: Marks & Spencer logo is seen on a shop in London, Britain, 23 May 2018. REUTERS/Toby Melville/File Photo
Marks & Spencer (M&S), Britain’s most famous shops of the group, said on Wednesday it will buy a 50% share of Ocado, the UK retail business for up to £ 750 million ($994 million), funded by a 600 million pound rights issue of shares and the 40 percent cut to its dividend.
Shares in M&S were down 9 percent at 0947 GMT, as a result of the equity raise, dividend cut, and fears it may have overpaid, while Ocado’s of 1.3 percent.
Both the stocks had risen sharply on Tuesday after consultations between the companies were confirmed after months of speculation.
M&S Chief Executive Steve Rowe rejected the suggestion that Ocado had the better of a contract to which the values of the joint venture of 1.5 billion pounds.
“We think that We are paying a fair price and I think Ocado do too,” he told reporters, adding the deal “will transform the BRITISH food online market”.
As well as the retail joint venture agreement, M&S will be a technology customer of Ocado.
“Not only have M&S paid a lot of money for 50 percent of the new joint venture entity, the new joint venture will also feed the hungry (Ocado) technology business,” said Bernstein analyst Bruno Monteyne.
The joint venture will trade as Ocado.com from September 2020, at the latest, after the termination of Ocado’s sourcing agreement with upmarket grocer Waitrose, which is owned by the John Lewis nership.
Waitrose confirmed that its in the near two year long commercial arrangement with Ocado will end up as the focuses on his own online operation.
“We have strengthened our own online business significantly and said last summer that we double Waitrose.com within five years,” said Waitrose Director Rob Collins.
Online, it is Britain’s fastest growing supermarket segment. It is expected to grow by 52 percent in the next five years to 17.3 billion pounds, according to industry researcher IGD.
Although Ocado has a 1.3 percent share of Britain’s supermarket, to the 6.9 billion pounds in stock market valuation is the result of the technological side of the business.
The technology arm provides retailers with the infrastructure and software to create their own online grocery businesses to compete with tech giants such as Amazon.
Founded by three Goldman Sachs bankers, 19 years ago. Ocado struggled for years to make a profit, but has changed in the past year after the success of the main technology deals with international retailers, such as the AMERICAN group Kroger Co and France in the Casino.
M&S, a 135-year-old clothing and food retailer, is a mainstay of Britain’s shopping streets, but has struggled to cope with the rise of fast fashion, discount stores and online shopping.
The company currently sells wine, flowers and clothing online, but not a complete delivery service for its food, putting it at a disadvantage to rivals such as Waitrose and Britain’s two largest supermarkets, Tesco and Sainsbury’s.
Some analysts have said they are wary of the M&S brand, the ability to the online economy, given the fact that the investment firm is a natural tendency to ease and events.
Only in the last month, Rowe said M&S basket size was not suitable for a full online grocery service, pointing to 41 percent of the customers visit the store for “today/tonight”.
Rowe struck a different note on Wednesday.
“We believe that our products, combined with Ocado’s own brand, and their extensive range of other products from the brand to complete that basket,” he told reporters.
The joint venture will offer more than 50,000 different products to shoppers – a combination of M&S brand range and Ocado, the range of own label and third party brand products.
For Ocado, the deal is a major boost after a devastating fire this month on its flagship robot distribution center.
FILE PHOTO: A man walks from the reception of the Ocado CFC (Customer Fulfilment Centre) in berkel-enschot, great Britain May 1, 2018. REUTERS/Peter Nicholls/File Photo
M&S and Ocado said that for the year to Dec. 2 2018, the joint venture would have sales of 1.47 billion pounds, and the core of the profit of 34.2 million pounds.
M&S said the deal would be the potential synergies of at least 70 million pounds per year, which is achieved by the third year following completion.
He also said that current trading was in line with the board of directors of the expectations.
Reporting by James Davey; Editing by Keith Weir