Ocado floats - by the skin of its teeth

Wednesday, Jul 21 2010 by
Ocado floats  by the skin of its teeth

Online retailer Ocado's controversial stock market flotation has been hit by further trouble as shares slumped in conditional trading ahead of the official listing next Monday. Ocado, set up by three former Goldman Sachs bankers ten years ago, had originally indicated a price range for its shares of between 200p and 275p, valuing the firm at up to £1.35bn. But potential investors, both institutional and retail, proved sceptical of this valuation for a company that has never made a profit in its 10-year existence (last year it lost £25m on sales of £437m).

A number of operational concerns have also been raised, particularly the fact that its exclusive partner Waitrose is apparently working on plans to launch its own competing delivery operation within the M25 in two years. As a result, the internet grocer cut the offer price yesterday for its initial public offering (IPO) to 180p but the move failed to boost confidence, with shares down 10% to 162p today. 

Hedge funds are believed to be keen to short the stock, believing that they can sell it now and buy it back for much less later. Broader institutional scepticism has also been widespread, with brokers lining up to express their scepticism and FTAlphaville dubbing the float Webvan2.0 in memory of the failed online US grocer from the tech bubble era. Amisha Chohan, an investment analyst at HB Markets, commented that "even at the revised valuation, the company is still overvalued and expensive". Take-up of a retail offer for Ocado customers has fallen far short of expectations (only £10m of an expected £50m has been raised but the deadline for this has been extended until Friday).

In a call earlier today, CEO Tim Steiner was repeatedly questioned on analysts’ negative views of the company’s prospects and how he feels about the share price sinking.  He fought back arguing that "the fact that our IPO completed successfully in very difficult markets is an endorsement of the long-term growth potential offered by Ocado", expressing his concern that people have lost sight of the fact that "we have floated to build the business and raise jobs in the UK".

The flotation, however rocky, could certainly still be considered something of an achievement given that Fairfield Energy had to shelve its stock market debut last week. Ocado shares are now expected to officially join the FTSE 250 index…

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Ocado Group plc is a United Kingdom-based online grocery retailer. The Company's principal activities are grocery retailing and the development and monetization of Intellectual Property (IP) and technology used for the online retailing, logistics and distribution of grocery and consumer goods, derived from the United Kingdom. The Company offers end-to-end operating solution for online grocery retail based on technology and IP, suitable for operating its own retail business and those of its commercial partners. The Company's brands include Ocado, Ocado Smart Platform, Sizzle, Fetch and Fabled. Sizzle is a kitchen and dining store. The Company's Ocado Smart Platform is a solution for operating online retail businesses. The Company's Ocado Smart Platform combines its end-to-end software and technology systems with its physical fulfilment asset solution. more »

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2 Comments on this News show/hide all

Dave Brickell 21st Jul '10 1 of 2

It still went at a whopping 41x forward EBITDA according to Nick Bubb of Arden Partners: 

Including the £200m of new money, the market cap is £937m at 180p and the EV/EBITDA would be around 41x, based on our £20m EBITDA forecast to November 2010, falling to around 28x, based on our £30m EBITDA forecast to November 2011.

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Fangorn 21st Jul '10 2 of 2

Way over valued imv. The business model doesn't inspire, particularly when their main customer, Waitrose, will be starting it's own delivery service within the M25 in the near future. And it's unlikely to make a maiden profit in the next couple of years either - nor has it yet done so.

One to short that's for sure,and it goes lower, way lower imv. No wonder hedgies are keen to short.

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