Investing in online grocer Ocado (OCDO) is a rollercoaster ride. During a year littered with new partnership announcements, the shares have jumped significantly, only to fall back on the release of annual figures, which showed the group slipping back into the red.
The latest news – that Ocado will partner with US grocery chain Kroger – has produced the biggest share price jump of them all, especially after analysts at Peel Hunt described the as-yet-unsigned deal as “a step change”. Kroger has agreed to take a 5 per cent equity stake via new Ocado shares as part of the agreement, which equates to £183m based on the last available closing price prior to the news. Not only that, Kroger has agreed to pay monthly exclusivity and consultancy fees to Ocado, a situation irredeemably more beneficial to the London-listed group compared with prior contracts. Finally, the drafted terms call for three new distribution centres – rather than just one – with a total of 20 potentially slated for the first three years.
With this news comes the inevitable question surrounding capital requirements. But quite how much this is all going to cost remains unclear. Analysts reckon current terms are based on capacity, rather than number of sites, so the eventual centres could be 10 larger sites (as per square footage), or 20 smaller ones. From an earnings perspective, Ocado's bosses say they expect the deal to be neutral in 2018.
Analysts at Shore Capital appear to have more reservations. Although the broker said it welcomed news of more international partnerships, the materiality of these deals, not to mention the effect on cash flow relative to the capitalisation of costs gives pause for thought. Issuing 5 per cent of new equity also leads to inevitable dilution of earnings, it said.
