There are two certainties about Ocado. First, it will take longer than investors expect to turn profitable. Second, it will take more money than they think to do it.
Equity capital markets have been basically closed this year, since investors have no appetite for speculative initial public offerings and the season of distressed cash calls hasn’t yet started. It’s fitting that the tech company-cum-grocer has stepped in to fill the gap with a £575mn placing.
Ocado has been remarkably consistent about tapping investors for cash over the past four-and-a-half years. Since it switched from delivering groceries to supplying the infrastructure for other people to do so, it has raised money on the way up — and now the way down. But there’s not much cause to think that’s about to change.
Two years ago it asked for just over £1bn, roughly two-thirds of it straight equity and the rest of it convertible debt. At the time, that seemed opportunistic. The company was three months from its pandemic-era share price peak. The combined package gave it £2.2bn of cash to play with. Now it seems more like a necessity.
While Ocado still had £1.5bn in liquidity at year-end in November, it had capital expenditure of £680mn last year. That figure is set to rise further, to about £800mn. Since the start of 2018 Ocado has raised £143mn from one placing, £183mn via a cash injection from customer Kroger, £563mn from selling half of its old retail business to Marks and Spencer, and £657mn from the 2020 equity raise. A profit warning from the retail joint venture last month may have hastened the cash call along, but the pattern here should be clear. This is a business that eats money.
Ocado says things are now different. This, it says, will be the last time it taps shareholders for funds. The placing and accompanying new revolving credit facility will give it enough headroom to “fund the requirements of its existing and expected customer commitments into the midterm”. After that — supposedly four to six years from now — it’s meant to turn cash flow positive and no new group financing will be needed.
To be fair, the context has shifted since last time round. The markets are much less willing to fund unprofitable growth, of which Ocado has been the UK champion. At £6bn its market capitalisation is less than a third of its peak. If it was a private company, its backers would probably have lost patience by now. Instead, it has the likes of Capital Group, Baillie Gifford and Jörn Rausing to stand behind it, good for around £210mn in the latest raise. But even they may demand greater discipline.
Investors are also less starry-eyed about the prospects for online retail. There hasn’t, as boss Tim Steiner claimed, been a real inflection point. Shoppers have not shifted online en masse. Earnings at the joint venture, Ocado Retail, are under pressure just like everywhere else. In the latest cash call Ocado is no longer talking up the opportunities for further global expansion. It more or less wants money to do what it’s already committed to doing.
But then investors aren’t paying for the pandemic bump any more. Shares are back to roughly where they were at the start of 2019, and its economics will improve as more of its warehouses finally open. It had 10 up and running by the end of last November. By November next year, it should be 30.
Admittedly, Ocado’s business model is still very far from “proven” as the company claims. It projects £6.3bn in revenue and £750mn in earnings before interest, taxes, depreciation and amortisation, but doesn’t say exactly when it will get there. Given past form on earnings misses, don’t bet on it happening sooner rather than later.
But all that said, this is meant to be the type of company London’s equity markets just won’t back. Ocado is proof that they can. It’s an unprofitable, cash hungry company that has been afforded an extraordinary amount of time and capital to prove itself. Expect it to take more time and more money. But at this point — and this price — what’s a little more?
For an early morning round-up of the latest business stories sign up to Cat’s City Bulletin newsletter