Ocado (OCDO)’s last remaining short-sellers were put to the sword in spectacular fashion today as the technology stock masquerading as an online retailer produced easily the biggest deal in its history.
Shares rocketed 42% to record levels after Ocado said it would partner with Kroger to create as many as 20 automated Customer Fulfilment Centres (CFCs) in the United States, where Kroger is the country’s second largest grocer.
As Ocado pointed out to analysts in a call this morning, agreeing a deal for 20 of these warehouses with one partner has multiple benefits compared with agreeing CFCs with 20 different partners.
The tie-up follows November’s warehouse and licensing agreement with France’s Groupe Casino and a similar arrangement with Canada’s Sobeys in January.
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Hedge funds and other speculators still betting against the company will be wishing they had closed out their positions in the wake of those announcements. Before the Canadian deal, Ocado was the third-largest short on the London market, with 13.5% of issued shares loaned out.
Valuing Ocado has never been easy, with this Marmite stock dividing opinion between those who appreciate its unique technology platform and those who see it as an over-hyped logistics firm operating on thin margins.
Research analysts at Barclays called the Kroger deal an “unmitigated positive”. They added: “The company now has an extremely credible partner in the largest grocery market in the world.
“With a commitment to identify 20 CFCs over the next three years, the pressure for Ocado to announce a certain number of CFCs per annum should subside (for some time at least).”
The finer details of the agreement with Kroger are still to be announced, but so far the terms look favourable to Ocado, with the UK firm set to receive compensation if Kroger fails to commit to target capacity.
Kroger’s exclusive partnership is also conditional on it meeting market share targets and ordering an agreed number of CFCs per annum.
And with Kroger buying the equivalent of 5% of Ocado at a value of £183 million, the FTSE 250 (MCX)Index stock now has some £300 million of capital available for investment.
It has discontinued all discussions with other US-based retailers, but remains free to pursue opportunities elsewhere.
Andrew Gwynn at Exane BNP Paribas has previously estimated that each CFC could generate around £6 million of underlying earnings, so today’s deal could be worth £120 million and possibly more depending on Kroger’s progress.
He added: “Short-term, we’d be minded not to get too far ahead of ourselves. It is worth reminding the obvious: this is food online which could be summarised as lot of effort for not a lot of reward (i.e. low gross profit, high cost to serve).
“Kroger though is the biggest deal Ocado could have hoped to sign we think (Wal-Mart (WMT) is going it alone it seems) and given the shares are essentially catalyst driven rather than an assessment of fair value, at least for now, then we’d not resist the large move in the shares this morning.”
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