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Ocado bounces as takeover of Whole Foods creates bid interest, technology spur

In a ‘Global Food Retailing’ note to clients, analysts’ at Credit Suisse reiterated their three reasons why they see the Amazon/Whole Foods deal as being positive for Ocado
Ocado van
At the start of this month, Ocado shares jumped after the group finally unveiled a long awaited international deal for its online shopping platform

After dropping sharply on Friday as food retailers quaked in reaction to Inc’s (NASDAQ:AMZN) surprise US$13.7bn takeover of Whole Foods Market Inc (NASDAQ:WFM), online grocer Ocado PLC (LON:OCDO) saw its shares bounce today amid vague hopes it might be the US internet giant’s next target, or at least a potential beneficiary.

In late afternoon trading today, after falls of around 5% on Friday, Ocado shares were up over 10%, or 28.7p at 304.5p.

WATCH: Spreadex's Connor Campbell on 'game-changing' Amazon-Whole Foods deal

READ: Amazon's shopping trolley mows down the food retail sector

In a ‘Global Food Retailing’ note to clients on online grocery and the impact of Amazon, analysts’ at Credit Suisse today reiterated their three reasons why they see the Amazon/Whole Foods deal as being positive for Ocado shares.

The Swiss broker's analysts said, this is firstly, because it provides an extra impetus for grocers to sign a technology supply agreement with Ocado, particularly in the US; secondly, because it increases the likelihood that Ocado is seen as an acquisition target; and thirdly, because, from a customer perspective, it helps move online grocery further into the mainstream.

The analysts added: “While the key deterrent to signing a deal with Ocado may have been cost (especially if third parties believe they can substantially replicate Ocado's technology), the driving force now may be speed to market. “

At the start of this month, Ocado shares jumped after the group finally unveiled a long awaited international deal for its online shopping platform, although there was some disappointment at the lack of detail about its new partner.

READ: Ocado shares jump as it signs a long-awaited international deal

The FTSE 250 firm only said it had signed an agreement with a “regional European retailer to use Ocado Smart Platform (OSP).”

But Ocado’s CEO, Tim Steiner, also said then that: “Our discussions with other retailers across the globe are ongoing and we continue to expect to sign multiple deals in the medium term."

In the UK, Ocado is partnered with food retailers William Morrison Supermarkets PLC (LON:MRW) and upmarket chain Waitrose, part of the employee-owned John Lewis Partnership.

Neil Wilson, senior market analyst at ETX Capital, said: “ Amazon’s snaffling of Whole Foods increases chances of Ocado being bought. But also perhaps a lot more importantly it makes it imperative for food retailers to get online sorted quickly and that might help Ocado to sign some more of those international deals it’s been promising.”

But net impact “difficult to assess” says Morgan Stanley

However, analysts at US investment bank Morgan Stanley said they think Friday's news has “both positive and negative implications for Ocado, the net impact of which is difficult to assess at this stage.”

In their note asking ‘What Amazon/Whole Foods implies for European grocers’, Morgan Stanley’s analysts said that, on the negative side, there “is the obvious impact of a direct competitor making further inroads in the grocery category (Amazon launched Fresh in the UK in June 2016), empowering further its supply chain in the UK and acquiring a well-liked and high-end brand (a segment of the market on which Ocado over-indexes).”

“However’, they added, “to put things in perspective, we note that Whole Foods only operates 9 stores in the UK (a market entered a decade ago) and that typically cross-border supply chain synergies are somewhat limited in food retail.”

The analysts said: “Bears might also argue that Amazon's move into bricks & mortar shows you cannot succeed as an online-only grocery retailer.  Although we certainly agree it is difficult, we wouldn't minimise Ocado's success of starting from scratch to growing to what is today a Top 3 position in the UK online grocery segment.”

The Morgan Stanley analysts added that, on the positive side, increasing evidence of “Amazon's clear ambition in the grocery category could prove to be a 'wake-up' call for all these retailers in developed markets with no (or very early stage) online grocery operations.”

They said: “With Amazon becoming a more immediate & medium-term threat, we believe this should translate into renewed interest for what Ocado can offer to third party grocers abroad.”

And, the analysts concluded that “Ocado's recently announced partnership with a regional European grocer certainly validates there is appetite for this type of offer.”

Activist investor urging Ocado technology rebranding

Aside from the Amazon/Whole Foods implications, traders also noted weekend press reports saying activist investor, Crystal Amber has urged the online grocer to rebrand in the City as a technology business.

The Sunday Telegraph reported that Richard Bernstein, the boss of Crystal Amber - which unveiled a 0.5% shareholding in Ocado at the start of June - is to meet Duncan Tatton-Brown, Ocado’s chief financial officer during the last week of June, to put his viewpoint on the group’s strategy.

The newspaper said the veteran activist investor thinks Ocado should focus more on technology analysts and “people who want to invest in technology” so that its business is better understood in the City.

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