Ocado’s £1bn fundraise announcement: What the analysts say

Ocado Group on Wednesday evening announced it was seeking to raise more than £1bn to capitalise on the coronavirus-prompted online grocery boom. 

The company plans to raise £657m through placing of £650m ordinary shares and a £7m retail offer. It is also launching an offering of £350m through a convertible bond issue.

With online share of grocery sales increasing globally, the capital raise will give Ocado the “financial flexibility to capitalise on opportunities arising from the significant acceleration in online adoption and grow faster over the medium term” it said.

Here’s what the experts have to say about the move.

Sophie Lund-Yates, equity analyst at Hargreaves Lansdown:

“On paper there are reasons to respect Ocado’s decision to come back cap in hand. Striking up deals with retail partners to allow them to use its patented and efficient packaging systems is integral to Ocado’s future success. And if the pandemic causes a rapid uptick in demand for these partnerships then it’s important Ocado has enough firepower to capitalise on the change.

“However, there’s no ignoring this latest fundraising effort is a bit irksome. It was only December when Ocado last asked for money to help fund the deal with Marks & Spencer. It’s surprising to see such huge sums, and dilutive new shares, being needed so soon. Half-year results in July should offer a bit more insight in terms of how quickly Ocado is burning through its cash. The priority now is banking the plethora of new Solutions deals that are supposedly coming Ocado’s way.

“Coronavirus has accelerated the shift to online shopping. This will have permanent and immediate ramifications for the retail sector, especially the grocers. Those of us who have become accustomed to supermarket delivery will have little reason to go back, compared to, say, someone who enjoyed a bit of fashion retail therapy before lockdown.”

Brittain Ladd, supply chain consultant and former Amazon executive:

“As Vladimir Lenin stated: ‘There are decades where nothing happens, and there are weeks where decades happen.’ Because of the coronavirus, online grocery penetration has increased in a matter of weeks that was estimated to take years.

Ocado must move fast to seek out as many opportunities as possible to sign new customers; increase investment in micro-fulfilment; and put distance between itself and a growing number of competitors.

Tim Steiner has done a fabulous job leading Ocado. He understands that retailers that may have had no interest in Ocado a few months ago now view Ocado as a must-have for their survival. I strongly advise Kroger – the United States’ largest supermarket by revenue – to reconsider acquiring Ocado. In fact, not only do I recommend that Kroger acquire Ocado, I believe they should name Tim Steiner their CEO and the CEO of Ocado. Naming Steiner CEO of the combined companies will accelerate Kroger’s position as a retailer in the USA. It also puts Ocado in a position to attract even more investment dollars.”

Nick Bubb, independent retail analyst:

“Our initial reaction on hearing the after-hours news yesterday evening that Ocado was looking to raise around £1bn through an equity placing and convertible bond offer was that it was a real cheek for Ocado to ask investors to stump up more, as the company still has a tonne of cash in the bank from the M&S deal.

“But with investor appetite for online stocks starting to wane in the short-term, after the huge rallies in recent months, the company must have been nervous that if it waited too long it might have missed the boat.

“The bulls point to the huge opportunity (and the cashflow demands) of building CFCs with existing global partners and the massive boost to the online grocery market from the pandemic. The bears say that the perennially loss-making Ocado is only good for burning through cash and that the dedicated warehouse model is still not as flexible as the combined store picking/warehouse model of Waitrose and others. And the company has announced that the equity placing of £657m has been completed overnight at a price of 1960p, a mere 5.7% discount to the closing price of 2079p, which capitalised mighty Ocado at £14.8bn.”

Ash Sharma, research director at supply chain automation market intelligence firm Interact Analysis:

“Ocado is trying to expand into a fast-growing online grocery market. This round of fundraising comes at an opportune time with grocery retailers facing challenges and huge demand and opportunities as a result of the pandemic. This ambitious fundraise will allow Ocado to greatly accelerate its expansion into the grocery market at a time when its valuation is at an all-time high.

“Prior to coronavirus, Ocado was actively transitioning towards being a technology provider for other grocery companies and being very successful at it with major wins in the US and Australia. The pandemic has turned the retail world on its head and has greatly accelerated the shift to online grocery shopping, as well as shifts in consumer purchasing habits in store. Ocado’s technology can be relatively rapidly deployed and is seen as a very attractive option for grocery companies worldwide.

“Our analysis shows that more than $18bn will be invested globally in automation of grocery supply chains and warehouses. Ocado is well placed to capture a significant chunk of this. However, they will face stiff competition from alternative automation providers and technology.

“One question remains over the strategies that grocery companies will employ to get their goods to the consumer: will they pursue delivery to consumers directly from warehouses or will they focus more on a click & collect model? Most likely they will hedge their bets on both options, but it is the former where Ocado is most well positioned as a solution provider.”

Miya Knights, head of industry insight at Eagle Eye Solutions:

“Ocado is not the only retailer that has looked to increase liquidity during the lockdown, in response to soaring demand and accompanying capital-intensive staffing, PPE and health & safety requirements. Some have increased banking facilities or signed sale and leaseback deals for capital assets, like head offices and distribution centres. Others, like Ocado, are raising capital via the stock markets.

“Unlike many other retailers that have done this though, Ocado’s announcement positions its move as investing for growth, as opposed to shoring up balance sheets or boosting cashflows. It is able to quote some impressive supporting global growth forecasts, which it is no doubt predicating this move on, so it can capitalise on the accelerated shift to online after lockdown. I also note it mentions using its OSP technology and auto-fulfilment expertise in ‘other adjacencies’, which makes sense given such growth across other sectors too, not just in grocery – although grocery is the fastest-growing and least penetrated online sector worldwide.

“But I do think its move underlines the fact that automated fulfilment robotics and AI-based technologies are still relatively expensive investments. It’s just that they are now strategically essential for managing the scale and velocity of rapidly growing online demand, and optimising inventory management across stores and online. So, although it has a positive future outlook, Ocado will still have to spend more money to make money for the foreseeable future.”