City pressure mounts on Ocado ahead of float

Ocado, which is due to announce its final share price next week, this week came under a barrage of criticism for the proposed price range of between 200p and 275p, which would value the business at £800m to £1.2bn.

Schroders fund manager Andy Brough, who earlier this week quipped: “Ocado - Omnipresence Cannot Actually Deliver Opulence”, told Retail Week: “The investment community has told Ocado the valuation is too high.”

Analysts have also hit out at the price tag. Shore Capital analyst Clive Black said he would value the business at a maximum of £534m, while Collins Stewart analyst Greg Lawless values Ocado at just 128p per share - 46% below the mid-point outlined in the prospectus.

Arden Partners analyst Nick Bubb said a share price of between 160p and 180p would “save some face” for the management. He said: “This price would allow the float to get away and, while it would be painful, it’s not as low as the bears have been gunning for.”

Other City sources have told Retail Week that the price should drop even further, to between £1 and £1.30. One source said: “There is a big difference between the management expectation and what the City wants.”

Ocado is understood to be holding firm on its valuation. Ocado declined to comment as it is in a blackout period, but sources close to the company insisted there was an appetite for the float and talks were “going well”.

Roadshow in the US

Ocado’s team, headed by chief executive Tim Steiner, has been in the US this week canvassing investors. One analyst said: “Ocado have been doing a good job of marketing themselves in the US and [lead bank for the IPO] Goldman Sachs has a lot of clout over there.”

He said: “It might end up that most of the shares are taken up by US investors, as they are more geared up for tech stocks. But, [since it is] a consumer-facing business, valuing it as a tech rather than retail stock is not the right way to look at it.”

He added that US investors might not be as clued up about how competitive the UK retail market actually is.

Brough said: “You only have to look at how Amazon is rated to understand that US investors often overvalue things.”

Pointing to the IPO’s huge prospectus, he said that, if the price changed, Goldman Sachs “would have to cut down some more trees” adding: “They need to make clearer what the funds will be used for.”

Black argued that Ocado “could make for a compelling short [sell] … or we would avoid and wait for Ocado’s financial promise to be delivered in as well a packaged manner as its colour-coded bags”.

He said: “Ocado is effectively a distributor for Waitrose.”

Ocado sources most of its goods from Waitrose and it said in its prospectus that it “relies” on the Waitrose brand and own-label. Black observed that nearly half of Ocado’s sales are Waitrose own-label, adding: “Ocado does not have an infrastructure to procure the majority of its lines and doing so would be a considerable additional cost.”

Black also highlighted the threat that will come next year when Waitrose begins trading against Ocado within the M25, where 50% of Ocado’s sales currently come from.

There is also a threat from the UK’s competitive grocery players. Ocado’s price match against Tesco only covers certain items, according to Black, and it cannot match Tesco in terms of its Clubcard offer or suite of sub-brands.

Etailer Amazon also launched a modest grocery offer in the UK last week although, according to an ICM Poll commissioned by Retail Week, two-thirds (64%) of respondents shop with Amazon already but would not buy food from it.

Sources close to Ocado hit back at commentators who “do not understand the business model” and have not been to its Hatfield depot.

If the float falls through, it is thought Waitrose owner John Lewis Partnership could snap it up at a cheaper price. Other retailers that might look at Ocado include Marks & Spencer and Morrisons, which currently do not offer food online. But one source close to Morrisons told Retail Week: “The price would have to be very cheap.”