Ocado flotation: what the weekend papers said

Uncertain at best, but overvalued and risky at worst – this is the general conclusion of analysts and pundits on the flotation of grocery delivery business Ocado.

Analysts have long been sceptical about the prospects for a flotation, questioning why the company has not been able to find a trade buyer and doubting the timing of tapping investors in such tough markets. Collins Stewart added to these concerns on Friday, saying it would have to grow sales at 19% per annum for the next 10 years with returns twice as high as Tesco's to justify the offer price.

While concerns originally centred around Ocado’s assumed valuation of between £800 million and £1.2 billion, and the fact it is yet to make a profit, several newspapers found new holes in the delivery firm’s defence this weekend.  

Perhaps most damaging was the Financial Times report that some of the UK’s biggest investors were threatening to snub the launch at its current price, one of whom described the flotation as a ‘rescue rights issue’. The paper quoted Richard Buxton, head of UK equities at Schroders, as saying: ‘This is only for investors who wish to create capital gains tax losses... I would be amazed if this was covered at the lower end of the range.’

The Mail on Sunday claimed that auditors to Ocado had expressed doubt about its ability to continue trading without the sale of shares and a £100 million loan which is dependent on a successful flotation. Ocado subsequently dismissed this report as an accounting technicality.  

The Questor column in the Sunday Telegraph says Ocado is a bit like Forrest Gump’s box of chocolates - ‘you do not know what you are going to get’. The paper questions the strength of Ocado’s supply agreement with Waitrose, which lasts until 2020. Will Waitrose renew this contract or seek to expand its own home delivery network? Ocado is totally reliant on this contract.

Julia Finch in the Observer said that Ocado’s planned stock market flotation ‘looks increasingly like an attempt to push water uphill in a wire shopping trolley’. Finch cites the end of a non-compete agreement signed by Waitrose as another threat, as Waitrose will be allowed to compete with Ocado from next January. In addition the risk factors outlined in the prospectus run to 18 pages and the company is not complying with corporate governance standards, because half of its directors are not independent, the Observer says.