The announcement of one joint venture has caused two very different share price reactions. Marks and Spencer (MKS) has confirmed a new 50/50 partnership with online grocer Ocado (OCDO), aimed at taking the former’s food division digital. The deal will see M&S pay up to £750m in order to acquire a 50 per cent stake in Ocado’s UK retail business, while the new entity – to be known as Ocado.com – will effectively replace Ocado’s existing relationship with high-end supermarket Waitrose come September 2020. In a similar way, the new platform will offer customers Ocado’s own-brand products alongside M&S ranges.
But shares in M&S fell heavily in reaction to the news. Many investors are sceptical that such a deal will turn around the flagging food division, while plans to finance the deal via a £600m rights issue – to be launched "in due course" – don't appear to have gone down well. The aim is for the entire transaction to close in the third quarter of 2019.
Bosses claim they’ve identified up to £70m-worth of cost synergies from the new joint venture and that it offers a "strategically compelling" way to "unlock growth" for the food business "through a profitable, scalable presence in the online grocery market". However, Patrick O’Brien, UK retail research director for GlobalData, believes the price paid by M&S shows it is “desperate” to get into the online food market. According to Mr O'Brien, it also recalls the "predicament" supermarket chain Morrisons (MRW) found itself in, in 2013 when it paid "a high price to enter the market, having worried about getting left behind". It is estimated the new joint venture would have made cash profits of £34.2m in 2018, taking into account the new contract and associated fees.
Ocado shares moved up on the news, albeit more modestly compared with other deal announcements in the past 18 months. The group recently revealed a 12.3 per cent rise in annual revenues, reflecting a higher number of average orders per week and fees from new partnerships.
