Markets are nervous and it has yet to turn a profit. So what’s Ocado worth? And will it really float? Adam Leyland and Simon Creasey answer the questions


Q: How long has Ocado's flotation been in the works?
A: Arguably, since its creation in 2002, although it only started seriously considering an IPO 12 months ago.

Q: What took it so long?
A: Over the past eight years Ocado has burnt through £350m to find the right formula and turn a profit so it is more attractive to institutional investors.

Q: It's doing all right now then?
A: Yes. The latest results for the 24-week period ending 16 May 2010 show EBITDA up 181% to £8m forecasts suggest full-year EBITDA of £25m. Over the same period gross sales rose 30%, revenue was up 29% and operating losses fell 63% to £2.7m.

However, some analysts note Ocado has been very heavily marketing in recent months using money-off vouchers £10 off £75 spend to new and lapsed customers to get sales growth. And it has yet to make a post-tax profit.

Q: Why is it floating?
A: So the founders and investors the likes of John Lewis, P&G, UBS and Tetra Pak billionaire Jorn Rausing can get a return; and to raise further money both for expansion (it wants a second depot in the Midlands); and for potential economies of scale in its existing depot and delivery structure through an "enhanced technology mix, increased automation and increased delivery productivity" that is only achievable, it says, through additional capex.

Q: Why doesn't JLP buy it outright, instead of letting Waitrose compete with it?
A: At the back end of the dotcom boom, when it also bought Buy.com, Ocado was a new-media play for JLP, and it sees Ocado as a complementary business to Waitrose, with its own valuation over and above the value of the groceries it brings in.

Since JLP's 25% share of Ocado is now held by its labouring pension fund, it's as keen as anyone to realise some value.

Q: What of other trade buyers?
A: One must assume, given market nervousness, that they were offered, but turned it down. Morrisons is the only supermarket chain not to have an online presence, and Ocado's south east bias could be considered complementary; but Ocado's high-end offer isn't a great fit, and like a number of multiples, it's not convinced by the model; while the other obvious candidate - Marks & Spencer - doesn't have the offer or supply chain to support a partnership.

Q: It was presumably asking too much money, too. What does it think it's worth, and how much money is Ocado looking to raise?
A: The figure bandied about is £200m, valuing Ocado at £1bn.

Q: Will they raise that sort of money?
A: That's the $1.6bn question. Ambrian analyst Philip Dorgan said Ocado began with an O, ended with an O, and was worth zero. Shore Capital retail analyst Clive Black also baulks at the £1bn valuation. "That implies to us the need for c.£100m EBITDA in a reasonable period of time from Ocado for the stock to trade at 10x EV/EBITDA multiple (if it has an enterprise value of £1bn), a rating 25% to 30% higher than Tesco."

Q: But some analysts do support this valuation?
A: Yes. Some see it as another eBay, Netflix, Amazon or Asos - the enterprise value of internet clothing retailer Asos is 30 times. On the flipside, other analysts point out that Amazon doesn't have the cost or complexity of multi-temperature food products or one-hour delivery slots. It can use normal mail delivery channels and jiffy bags, whereas the big costs of online grocery are all in the last mile.

Q: So how does Ocado justify the stratospheric price tag?
A: Like other successful dotcoms, it is genuinely scaleable, it claims, delivering margins way higher than a traditional supermarket or a grocery dotcom picking set-up above a certain capacity.

Q: What are its growth prospects?
A: Good, based on its accounts. It is on track to break sales of £500m to year-end November. Furthermore its directors believe UK grocery has the lowest online penetration of all core consumer markets. It has also identified opportunities in non-food, and another potentially lucrative possibility is to replicate the model overseas through licensing deals.

Q: Is price the only sticking point?
A: Not at all. One issue is its apparent rivalry with partner Waitrose. As of next year both will offer online grocery shopping within the M25. However, Ocado also agreed a new 10-year branding and sourcing arrangement with Waitrose in May that will run until September 2020 (although either party can terminate from March 2017).

Others question the cost and payback on a second depot. The jury is also out on whether offering shares to customers who spent more than £300 in the last six months was neat or clumsy.

Q: Given current market turmoil, why now? What's the rush?
A: Good question. Collins Stewart analyst Greg Lawless says it makes more sense for Ocado to profit at the operating (EBIT) level first. He questions why existing shareholders aren't willing to invest further to get it to break even.

A senior industry source is equally sceptical. "If it's at the point in the curve it says it is at, it shouldn't need the money, and could therefore wait to guarantee the price it wants."

Q: So, will the flotation happen?
A: The turbulent market has caused a number of high-profile flotations from the likes of Travelport, New Look and Merlin Entertainments to be abandoned.

However, SuperGroup, owner of the uber-trendy SuperDry fashion label, proved you can successfully get an IPO away in the current climate. It floated in March with an IPO share price of 500p when The Grocer went to press the share price was 732p.

Ocado is certainly giving itself the best chance. At an estimated cost of £15m (almost double its recent half-year EDITDA) it's hired the best lawyers (Slaughter & May, Allen & Overy); the cream of the investment banks (Goldman Sachs, JP Morgan Cazenove and UBS); and big-shot City PR firm Brunswick. If anyone can get the IPO away, they can.

Q: What happens if investors want in but don't like the price?
A: The advisers might ask the shareholders to lower their expectations on valuation, while still being able to raise the finance it needs. Investors might also ask the founders not to cash in their stock just yet, locking them in for a longer period, to eliminate fears of a short. 

Q: What happens next?
A: A prospectus will be published next week on Ocado's dedicated IPO website. 'Investor education' is well under way and over the next couple of weeks managers will be wheeled out in front of potential investors. If the feedback matches Ocado's aspirations or is at least palatable, it hopes to get the IPO away this month.

Sources say Ocado is confident and analysts agree it's a good business. However, the key question is: is it a good investment?

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