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Bloomberg
Marks & Spencer Group Plc fell the most in two and a half years after the retailer said it will finance a nearly $1 billion investment in online retailer Ocado Group Plc with new shares and cut its dividend.
M&S plans to offer as much as 600 million pounds ($797 million) in new stock to help pay 750 million pounds for a 50 percent stake in the partnership, diluting existing investments. Its shares fell as much as 10 percent, the most since June 2016, while Ocado rose as much as 6 percent.
The agreement raises questions about the strategy of M&S, which will unseat John Lewis Partnership Plc’s Waitrose as the tech startup’s main grocery supply source as of September 2020. Until now, M&S has focussed on selling small baskets of premium-price grocery items, while large orders are more viable in low-margin e-commerce.
“M&S still haven’t proved that they can generate a high enough shopping basket to make online grocery pay, so this seems a huge leap in the dark for them,†independent retail analyst Nick Bubb wrote in a note to clients.
LICENSING BUSINESS
The deal combines M&S’s branded food and beverage range, currently sold in the company’s “food halls†and convenience stores across Britain, with Ocado’s own-label and third-party branded products. It allows Ocado to focus on its business that licenses automated warehouse technology to supermarkets, which has grown faster than the UK grocery operation.
“This is a transformative deal in the UK grocery market which brings together two iconic and much loved British retail businesses,†Ocado Chief Executive Officer Tim Steiner said by phone.
UK stores have been struggling to compete with the rise of online shopping, as the Brexit-induced weakness of the pound squeezes profit margins, contributing to the growth of empty shopfronts throughout the country’s town and city centers. Discounters Lidl and Aldi are adding to the pressure, prompting market leader Tesco Plc to create its own cut-price store brand and J Sainsbury Plc to seek a purchase of Walmart Inc.’s Asda that now faces growing regulatory opposition.
The M&S venture with Ocado would have had sales of 1.5 billion pounds and earnings before interest, taxes, depreciation and amortization of 34.2 million po-unds for the 52 weeks through Dec. 2, the companies said. Waitrose products, which have been delivered by Ocado for about a decade, will become exclusively available via the grocer’s own e-commerce service and in its stores when the partnership ends in September 2020.