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M&S set for big rights issue, divi cut to fund online grocery joint venture with Ocado

Last updated: 09:10 27 Feb 2019 GMT, First published: 07:22 27 Feb 2019 GMT

delivery
The JV combines Ocado's UK grocery retail business and M&S branding and sourcing

Marks and Spencer Group PLC (LON:MKS) is to invest up to £750mln in a new 50/50 online grocery joint venture with Ocado Group PLC (LON:OCDO) for which the FTSE 100-listed retailer will need to launch a £600mln rights issue and which will lead to a cut of 40% in its dividend.  

Under the joint venture, M&S is acquiring a 50% share of Ocado's UK retail business, which will be supported by its Ocado Smart Platform (OSP), for a total consideration of up to £750mln, including a deferred consideration of up to £187.5mln, plus interest.

READ: Ocado and M&S confirm talks regarding joint venture

The JV will trade as Ocado.com but benefit from access to M&S's brand, products and customer database from September 2020 at the latest, following the termination of the current Waitrose sourcing agreement and migration of JV sourcing to M&S.  

In a statement, M&S said that for the 52 weeks ended 2 December 2018, the newly created JV would have generated revenue of £1.468bn and underlying earnings of (EBITDA) of £34.2mln, taking into account the newly created OSP contract and other fees and services and, furthermore, under the new sourcing arrangement the JV will no longer incur sourcing fees payable to Waitrose, which were over £15mln in 2018.  

The high street retailer added that it sees significant potential synergies for M&S Food estimated of at least £70mln per annum to be achieved by the third year following completion.

Cash call, divi cut

M&S said the transaction will be primarily financed by equity but added that it intends to conduct a rights issue to raise up to £600mln, which will be launched in due course, and which is fully underwritten on a standby basis by Morgan Stanley.  

Concurrently, the company said, its dividend per share is being reset by 40% to a sustainable level from which to grow in line with earnings over time.  As a result, the group anticipates paying a final dividend in respect of 2018/19 of 7.1p per share.   M&S also pointed out that: "Current trading remains in line with Board expectations."

Steve Rowe, M&S CEO said: "Our investment in a fully aligned joint-venture with Ocado accelerates our Food strategy as it enables us to take our food online in an immediately profitable, scalable and sustainable way.”

He added; "This is a transformational step forward in shaping the future of M&S and in becoming a truly digital-first retailer with at least a third of the business online."

Tim Steiner, CEO of Ocado CEO commented: "The combination of Ocado and M&S will allow us to grow faster, add more jobs, and create more value, as we lead the channel shift to e-commerce here in the UK. We are very excited by the many opportunities ahead."

Deal makes sense for both parties

Laith Khalaf, senior analyst at Hargreaves Lansdown commented: ‘This deal is a case of the old meeting the new. M&S has clearly decided if you can’t beat them, join them, and in a digital age it simply can’t afford to ignore the online audience for food.”

He added: “The market is likely to take the rights issue in its stride, therefore. M&S has announced a big dividend cut in its announcement, however, to shore up the balance sheet for future investment.

“That may well be needed to drag M&S into the twenty-first century, but income investors don’t like dividend cuts of that magnitude, and are prone to dump a stock if it doesn’t continue to meet their need for a decent yield. That’s likely to heap downward pressure on the share price.”

Khalaf continued: “The agreement to start selling M&S general merchandise through Ocado.com is also an interesting move. It’s a new departure for Ocado, which could be a sign it’s thinking of using its robot warehouses to attack this part of the market too. We’ll be watching closely to see how this develops.”

The analysts concluded: “For both parties, the deal makes sense, and is a positive move that will enable future growth. The dividend cut is a sting in the tail for M&S investors, however."

In early morning trading, M&S shares were 8.5% lower at 277.30p.

Meanwhile, Ocado shares were up 1% at 999.40p having jumped yesterday on news of the joint venture talks.

 -- Adds analysts comment, share prices --      

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