Analysts have moved to quash speculation today (25 January) that Morrisons or another major UK grocery retailer might be looking to acquire online-only operator Ocado.
Shares in Ocado have risen around 30% over the last couple of weeks, hitting a high of 239p yesterday, almost doubling the share price following its IPO in July. Amid the rise in the stock, there has been speculation of possible takeover interest from the likes of Morrisons.
However, RBS analyst Justin Scarborough today insisted there would be “no logic” in such a move, a sentiment echoed by Shore Capital analyst Clive Black who said he would be “surprised”, although he added that “you can never say never”.
“Every time the Ocado share price moves up, the media go out and say that Morrisons or Asda is out there bidding for Ocado, because they haven’t got online grocery, and Morrison’s doesn’t have online grocery at all,” Scarborough said.
“I would suggest quite clearly that Morrisons are doing their own thing in terms of investigating and working out what their online strategy is going to be and that, in my view, in no circumstance would include a bid for Ocado in any way shape or form”.
Scarborough added that from a financial perspective, if a company bought Ocado at 240p a share, they wouldn’t make an after tax profit on capital until November 2017. “I think that if you look at it from that financial perspective, not many boxes would be ticked for any buyer at these sort of prices”.
He also questioned the timing of the speculation, saying that if anyone was interested in acquiring Ocado they would have entered discussions in the run up to the IPO when the retailer was having problems getting it away.
Black, meanwhile, said that the Morrisons and Ocado brands would be “incompatible” from a branding perspective and are “wholly different”.
Black attributed the increase in Ocado’s share price to the possibility of an investor working to close a short position, which is pushing up the stock. Black also suggested that shares may be up ahead of the retailer’s full-year results next week, although he said there are “unlikely to be any surprises as far as profitability is concerned”, but added that there could be some structural changes within the operator.
Verdict retail analyst Malcolm Pinkerton, also suggested that rumours that Tesco, Morrisons or Marks and Spencer are looking to acquire the retailer are “pure speculation”.
While he said that Ocado’s model is “probably the most efficient and the best”, it does not fit with a national retailer like Morrisons, as it “lacks the scale” to fulfil orders in Morrisons “heartland” due to its London focus. Pinkerton added that Asda, Sainsbury’s and Tesco are too far advanced with their own online plans to need to acquire Ocado.
However, he did add that Ocado does need to consider what it will do once its exclusive relationship with Waitrose ends, but added that partnerships or joint ventures would be more likely. The contract with Waitrose means that Ocado can sell Waitrose products and use the Waitrose logo on its website and delivery vans.
Highlighting the strength of Ocado’s model, Pinkerton suggested that a partnership with a retailer like M&S, which does not currently have an online grocery offer would be plausible, but also suggested joint ventures with international retailers like Carrefour, which has been rumoured in the past, as possible points of expansion.