INT. PHIL’S ROOM – DAWN
A digital clock-radio changes from 5:59 to 6:00 AM. The radio comes on, playing the end of the Sonny & Cher hit, “I Got You, Babe.”
Phil sits up in bed and looks around the room. The decor is typical bed and breakfast, with flocked wallpaper, framed prints and an odd assortment of mismatched furniture. Pushed under the room’s door is a newspaper.
Phil squints to read the headline. It says: “Ocado rises as rumours of bid interest circulate”
Which year is it? Maybe 2016, or 2020, or 2013, or 2017, or 2012, or . . . . Languidly, Phil reaches for the paper and starts to read. He perks up a little on seeing it’s The Times, dated June 22, 2023, and the report is by veteran scoop-getter Dominic Walsh:
[Y]esterday Ocado spent most of the session at the top of the FTSE 100 leaderboard as speculation of bid interest from more than one American suitor took hold. The talk was that technology heavyweights such as Amazon were pondering the merits of an £8-a-share move, with Goldman Sachs and JP Morgan, as it happens, said to be acting for bidders.
Phil has been around long enough to know the routine. First, he checks the Ocado share price. It’s up more than 40 per cent intraday, which is more than sufficient to require a statement if there’s anything needing said:
The UK Takeover Panel will want a statement from a company based on a combination of whether its share price moves more than 5 per cent in a day, and/or if there was a 10 per cent move since prospective bidder’s consideration of the target began, and/or if there has been specific and accurate press speculation.
This latest Ocado rumour ticks two of those boxes. And so far, no statement. Odd. But since the Times hasn’t suggested that an approach has been made, maybe nothing needs said?
He tries contacting Ocado; no comment.
The mention of Goldman Sachs in the Times report also strikes Phil as odd, since Goldman has been Ocado’s house broker ever since the company floated in 2010. The company was built by three former Goldman bankers: current CEO Tim Steiner, former commercial director Jason Gissing and former COO Jonathan Faiman. He tries contacting Goldman; no one answers.
Frustrated, Phil opens his email. At the top of the inbox there’s a snap note from Jefferies analyst Giles Thorne:
Ocado’s equity has struggled post pandemic with a rising cost of capital coinciding with a commercial model that has put a strain on near-term cash flow and the balance sheet in favour of unlocking close relationships with key partners and a long-term annuity stream therefrom. With c.14% of the free float out on loan, it has evidently been a popular short.
It’s in this context that the overnight news of bid interest from Amazon (and others) should first be seen. The positive response of the equity is likely to outstrip the probability-weighted take-out price. A deeper consideration of the strategic logic and the actual likelihood of an official takeover approach will have to wait for more details. For completeness, we’ve long been a believer that Ocado is The Denizen of Grocery Digitalisation, and therefore has strategic value.
“The Denizen of Grocery Digitalisation” is a link that leads to a Jefferies note from 2021 that sets an £18.50 price target. By skimming the executive summary Phil is reminded of the basics of the Ocado investment case — grocery delivery economics are terrible but Ocado, as a potential incumbent wholesaler of an off-the-shelf solution promising the possible lowest unit costs, might come good eventually.
Having already read too much of this stuff over the years on downmarket financial blogs, Phil switches to his IHS Markit login and checks Ocado short interest. It shows 15.5 per cent of the free float on loan — down a bit from a high that followed its weaker-than-expected full-year results in February, but still equating to nearly 30 days to cover:
Ping! Another email arrives, this time from Exane analyst Andrew Gwynn:
As to the suitors, we think any approach would be focused on acquiring the technology rather than Ocado as a going concern given it is heavily loss making and cash burning. As such, potential indigestion / objections from existing partners (including M&S) doesn’t seem that important to us.
[T]hough Amazon is often mentioned, it has recently said that its ambitions in grocery centre on the need for stores given its Amazon Fresh proposition is small. Online grocery is instead dominated by incumbents, and we’d look to the larger of these (Walmart, Kroger – already a partner) as more likely suitors.
Daily volume in Ocado shares is about 20 times the average for this time of day, Phil notices. Short squeeze? Or something more? There’s a long list of hedge funds betting against Ocado. And since Ocado has a tight, largely US shareholder base it’d only take one or two being margin called to cause havoc.
Phil checks the wires once more for any kind of statement. Still nothing.
CUT TO: THE PARLOUR OF THE B&B
A woman is watching TV. In the corridor behind her, Phil walks by, dressed in a robe, carrying an electric toaster and a towel, heading for the bathroom.
Further reading:
— After losing £1.5bn, Ocado remains as committed as ever to losing money (FTAV)