Re: Flotation
Dear Michael,
We commend you on the brave decision to seek a stock market listing (of up to £1.1bn!) for Ocado. But before we think about committing any of our hard-earned cash, we have some questions.
These relate mainly to the new sourcing agreement with Waitrose and the £100m loan facility (which no doubt you will be familiar with). But there are others.
1) What was behind the negotiations that led to the 2010 Sourcing and Branding agreement with Waitrose? Is it the case that, in order to secure the new bank facility, your lenders insisted on an extension to the existing agreement (which would have expired in 2013)?
We see this as important because you appear to have given up the best bits of the previous deal — specifically the non-competition agreement within the M25, where apparently you have a 50 per cent market share (and the monopoly on the supply of organic pesto to the residents of Hampstead).
2) Do you believe that the ability to source 20 per cent of your 3rd party and own brand-goods away from Waitrose compensates you for the loss of the intra-M25 non-compete, the 36 per cent increase in sourcing fees, introduction of a minimum sourcing fee 25 per cent higher than last years fee, and £40m penalty payment if you are taken over by a competitor?
Here is the full non-compete clause:
Restrictions on WaitroseDeliver In addition to amending the Sourcing Agreement and replacing the Branding Agreement with the Branding Arrangements, Waitrose and Ocado agreed in the 2008 Agreement to relax the non-compete provision applying to the WaitroseDeliver service which had been contained in the shareholders’ agreement. This provision was relaxed further under the 2010 Agreement.
As a result, until 31 December 2010, Waitrose is prevented from offering the WaitroseDeliver service to any person living within the area bounded by the M25 motorway. This prohibition does not extend to a limited number of deliveries made from five Waitrose stores within the M25 to customers in certain postcode areas. Between 1 January 2011 and 30 June 2011 Waitrose may effect a phased extension of the WaitroseDeliver service within the M25, so that by July 2011 it may provide the service without contractual limitations.
3) Given Ocado has almost no experience of sourcing outside of the Waitrose sourcing agreement (which provides 98.5 per cent of lines) why do you expect the market to believe that this recent change in strategy will compensate for the loss of the non-compete clause?
4) Given that the Hatfield warehouse Customer Fulfillment Centre (CFC) is now running close to capacity (on May’s figures), and you state that a £30m investment is required immediately to increase capacity, why do you state that you have operational leverage?
5) Further, given the CFC is close to capacity and the company is still not profitable, what leads you to believe that the addition of another (initially underutilised) CFC will lead to profits?
6) Is Ambrian’s retail analyst Philip Dorgan correct when he says capital expenditure over the next five years will be five times that spend over the past five years? Does this not suggest that Ocado will never make substantial amounts of money? In which case, would it be fair to view this as a desperate cash call dressed up as a growth opportunity?
7) Finally, why is the IPO being price so aggressively when your accounts carry an emphasis of matter such that, if the float fails, you would not be a going concern?
(Emphasis ours)
The auditor’s report on the Statutory Financial Statements of Ocado Limited for the 52 weeks ended 29 November 2009 was unqualified but included an emphasis of matter relating to going concern on the basis of the uncertainty of the Group’s future funding, since the £200 million of net proceeds from the offers of shares (the ‘‘Offers’’) and the ability of the Group to be able to draw down on the new bank facility (the ‘‘New Facility’’) could not be taken into account when forming that opinion. That uncertainty will be resolved on the receipt by the Company of £200 million of net proceeds from the Offers and the Group being able to draw down on the New Facility and therefore there is no emphasis of matter contained in the Accountant’s Report on the Historical Financial Information contained in Part V(A) of this document.
(Shamelessly based on an original idea and work by Taxloss).
Update (16.48GMT): A couple of other questions for Mr Grade.
– Why has Ocado chosen not to comply with the UK Corporate Governance Code?
– Why are some of the founders cashing out?
Related links:
The 10 questions Ocado needs to answer – Financial News
Webvan 2.0 prospectus – FT Alphaville
Related links:
Webvan 2.0 – FT Alphaville
Tough Economics and High Valuation – Ocado – Long Room