February 26, 2019 / 5:16 PM / a month ago

Breakingviews - Ocado will do better than M&S out of a tie-up

An Ocado leaves the Ocado depot in Hatfield, southern England July 21, 2010.

LONDON (Reuters Breakingviews) - In some weddings, there’s an obvious winner. Ocado would do better than Marks and Spencer if the two UK grocers go ahead with a joint venture that could see the latter paying a hefty price to secure a much-needed delivery service.

Ocado may sell a 50 percent stake in its retail division for up to 900 million pounds, the Evening Standard newspaper reported on Tuesday. The two companies said they were in talks but a deal wasn’t guaranteed. If the plan comes off, M&S would solve the problem of how to deliver to even some of its 12 million food customers. The high-street retailer has lagged larger rivals, such as Tesco, that spent years investing in delivery vans and websites and can better compete with the threat from Amazon.

M&S desperation may have pushed up the price. A deal that values the whole of Ocado’s retail business at 1.8 billion pounds would be more than investors had expected. Bernstein analysts previously estimated the unit was worth around 1.2 billion pounds. That’s good news for Ocado.

First, a joint venture might be a first step towards getting rid of the retail division altogether, with a decent price tag. In the meantime, cash from the deal could be used to invest in the company’s technology business, which kits out warehouses for retailers like France’s Casino. And if the joint venture goes ahead, the valuation of this fast-growing business also becomes clearer - around 4.8 billion pounds, or roughly 40 times the unit’s sales for 2018.

Still, the tie-up comes with risks, especially for M&S, whose clothing business is an even bigger problem than the lack of a delivery service. The partnership is likely to replace Ocado’s relationship with Waitrose – one that can be wound up if notice is given by March 1. But M&S offers a narrower range of groceries than Waitrose and may struggle to hang on to Ocado’s existing 700,000-plus customers. As a result Ocado may need to forge new partnerships to offer customers the variety to which they are accustomed. To secure its future, M&S may have to accept its partner’s roving eye.

Breakingviews

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