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Ocado shares jump on Marks & Spencer deal chatter

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Ocado
Ocado

Ocado shot to the top of the FTSE 100 on Friday on speculation that Marks & Spencer is mulling a buyout of Ocado’s grocery website.

A Deutsche Bank analyst suggested there was scope for M&S to acquire the other half of Ocado Retail as its recovery picked up pace, having bought a 50pc stake for £750m two years ago.

Adam Cochrane wrote in a note that M&S’s cash flow was “no longer being squandered on an unsustainable dividend” but being saved to recover the retailer’s investment grade credit rating “that may be required to buy out Ocado”.

An investment grade credit rating allows a company to borrow more cheaply. M&S would need to obtain financing if it decided to make an offer for the rest of the Ocado joint venture.

In March 2020 the ratings agencies S&P and Moody's both downgraded M&S. This week Moody's revised its outlook higher but maintained its rating at Ba1 – still below investment grade.

Fitch downgraded M&S in April last year to “junk” status, one notch below investment grade, but revised its outlook to “Positive” this week.

The high street retailer stopped paying a dividend at the start of the pandemic and took out a Covid loan from the Government, which restricts payouts to shareholders.

Ocado’s shares jumped as much as 9pc, its biggest intraday rise in about a year, and were 8.5pc higher at £19 in late trading. The stock has shed almost a fifth of its value in the past 12 months.

M&S shares edged up 2.1pc to 241p, continuing their steady recovery over the past year from 130.7p, leaving the company worth £4.7bn.

Earlier this month M&S said it was “very pleased with the growth opportunities Ocado has presented”.

When the deal was first announced, there were concerns in the City that M&S had overpaid for its stake, but the move has turbocharged its online offering.

Clive Black, a retail analyst at M&S house broker Shore Capital, said a buyout was “one of the most obvious strategic questions for the M&S board” to think about, but it could be a while before it happened.

There cannot be a change to the current structure of the deal before the fifth anniversary of the deal - the 24/25 financial year - without “certain limited and customary exceptions”.

However, sources said that M&S “wanted to do a deal they could”.

M&S did not have an online offering before its tie-up with the online grocer. It started selling its products online through Ocado in September last year, replacing Waitrose on the website.

The joint venture contributed net profit of £28m for the half year, with M&S products sales on Ocado bringing in £309m, or 27pc of total sales.

There are plans to open three more robotic warehouses, expected to boost M&S online food sales even further.

M&S and Ocado both declined to comment.

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