Ocado has better options than a cheap sale
07/07/2023 06:18
(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own. Refiles to remove extraneous words in
first paragraph.)
By Karen Kwok
LONDON, July 7 (Reuters Breakingviews) - Ocado’s
OCDO.L best hope is a breakup, not a cheap sale. The UK
grocery delivery company’s share price has risen by nearly a
third since a June Times report that Amazon.com AMZN.O and
other U.S. groups are mulling a bid. But CEO Tim Steiner would
have to be off his trolley to sell out now on the cheap. He
should instead orchestrate a breakup.
Ocado’s business comes in two parts: delivering goods in the
UK, and licensing its know-how of robot technology for
warehouses to other retailers. The former makes up of some 80%
of Ocado’s revenue, is profitable and half-owned by British
retailer Marks and Spencer MKS.L . What Amazon and other
bidders may be interested in is the latter unit, which is
growing quickly and will next year finally generate positive
EBITDA, according to Visible Alpha.
But right now, an Ocado acquisition comes with several
roadblocks. In the United States, Amazon competes with
supermarket chain Kroger KR.N , which signed up to use Ocado’s
technology in 2018. Kroger could walk away from the deal to
avoid its information being leaked to Amazon, making Ocado a
less appealing target. Any other large U.S. retailer would face
a similar problem.
Besides, any offer would look opportunistic and require a
huge premium. Ocado has lost 80% of its market value from its
previous peak in February 2021. Ongoing court cases with
Norwegian rival AutoStore AUTO.OL over the patent of Ocado’s
warehouse technology have been a reason.
There’s another reason Ocado looks cheap. Its odd mixture of
grocery and warehouse technology makes it hard for investors to
value. It is now worth 5.1 billion pounds ($6.5 billion)
including net debt, which is 1.7 times the revenue analysts
expect it to generate next year, according to Visible Alpha
data. That’s far below warehouse peer AutoStore, which is valued
at over 8 times sales.
True, over half of Ocado’s warehouse business is based in
the UK, with fewer opportunities for growth. But even applying a
discounted multiple of 4 times 2024 sales to that unit, and an
AutoStore-like multiple to the rest, would imply a valuation for
the whole warehouse division of 6.7 billion pounds, using
Visible Alpha forecasts. Next, put the remaining retail business
on a multiple of 0.4 times sales, in line with peers, and the
total adds up to 7.5 billion pounds, including debt. Ocado’s
equity could be worth around 8.3 pounds per share. That’s some
4% higher than the price Amazon was reported to be considering
paying.
The fastest way to unlock that value would be to sell the
low-margin grocery business, most likely to partner Marks and
Spencer. That would also put Ocado in a stronger position if
Amazon, or anyone else, were to launch a bid.
Follow @karenkkwok on Twitter
CONTEXT NEWS
Ocado’s share price has risen 29% since a June 22 report by
the Times that Amazon.com or other U.S. retailers may be eyeing
a bid.
The U.S retailer may launch an 8-pound-per-share bid for
Ocado, according to the Times, sending its shares up over 30% on
the day. Amazon and Ocado have declined to comment on the
report.
Ocado shares were trading at 5.532 pounds on July 6.
(Editing by Neil Unmack, Oliver Taslic and Thomas Shum)
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