Even we are starting to get “really bored” with this, but another City analyst has published a damning note on Webvan 2.0.
This time the man who “doesn’t get it because he’s used to assessing the prospects of traditional high street retailers rather than new online business models such as Ocado”, is Evolution Securities’ Dave McCarthy.
And focuses on management remuneration and what the IPO cash will be used for. If you thought, for example, the £200m of new cash was earmarked for a second warehouse customer fulfillment centre, McCarthy says think again.
(emphasis ours)
Money raised:
Ocado is raising £200m to be invested in the business, plus c£200m is being sold by existing shareholders. Popular belief is that the new money will be used to fund a second CFC for £210m but most of the £200m being raised as new capital is already committed, as stated in the prospectus:
- £45m will be used within six months to repay some of the groups existing debt.
- £80m will be invested into the existing CFC to increase capacity to 180,000 orders per week from 105,000 orders. Note that this will lead to a substantial increase in depreciation and other costs pushing the break even point out even further.
- Company will invest between £2m and £10m per annum in existing “spoke” distribution (say £20-£25m over next 4 to 5 years)
So of the £200m, £150 m is already allocated/needed leaving just c£50m for the new CFC, which is likely to cost over £200m according to the company. Therefore to open another CFC, will require extra funding. The company states it “..believes that it will be able to procure additional funding for the completion and fit-out of the second CFC though additional finance leases and other forms of debt”. Investors should understand that they are not funding expansion via a new CFC but through expanding the original one. The worrying thing is that the company is close to its current capacity and is not making a profit.
Management Remuneration
Investors should be aware of how much of the £200m being raised will eventually work its way back to management (NB we are not talking about management selling existing shares but about the full cost of share awards, options and the remuneration package). We have not analysed this in full but we have some concerns based around management being able to receive payments based on share prices below the indicative price range.
- In 2008, the board was paid £0.7m. This rose to £1.7m last year. What “annual bonuses” will the board receive this year?
- What are the Key Performance Indicators that management are being assessed on?
- Are the share awards and options performance related and are they tied to profitability We would encourage investors to make sure that management remuneration is tied to performance. Management and shareholders interests should be aligned.
Something for retail investors to mull ahead of Sunday’s application deadline.
More in the usual place.
Related links:
Found – Ocado investor [updated] – FT Alphaville
This time it’s different – FT Alphaville
Ocadon’t – FT Alphaville
Re: Flotation - FT Alphaville
Reverse engineering Ocado’s valuation – FT Alphaville