M&S shareholders have reason to regret the Ocado merger

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At Marks and Spencer, executive bonuses returned last year. Store staff have had several pay raises. Prices for customers have been kept low, as much as possible, and the retailer’s latest earnings beat expectations. But shareholders have to wait until early 2024 to receive their first dividend since before the pandemic.

The group, whose long-running recovery efforts have spanned seven UK prime ministers, but finally appears to have a lasting effect, he eliminated payments at the start of the pandemic to protect his balance sheet.

It will be one of the last major retailers to restart them: Next did so in early 2022 (and has also been buying back shares), while Primark owner Associated British Foods resumed dividends in late 2021. Supermarkets, which grew during the Covid-19 crisis when restaurants and pubs were closed, it never completely stopped dividends.

Stuart Machin, the MS chief, says the caution in resuming payments reflects lingering uncertainty about consumer demand and cost pressures. Some costs in the food supply chain have been eased, but energy and wage bills remain high, and the effort you’ve made to keep prices low for consumers has eroded margins. The company also has a £200m bonus to pay at the end of the year.

But there is another factor at play. By the time M&S decides the size of its interim payment, it will know whether it needs to find £156m to pay Ocado the remaining consideration for its 50 per cent stake in Ocado Retail, the online supermarket jointly owned by the two companies.

Payment is contingent on Ocado Retail’s performance against an undisclosed target in the year to November 2023, and M&S has already reduced the estimated fair value of liabilities on your balance sheet.

It’s an irony that won’t go unnoticed by the company’s army of small shareholders (individuals make up almost 98 per cent of investors by number) who dutifully complied four years ago on the £600m rights issue it financed. most of Ocado. retail transaction.

That deal, billed at the time as a “profitable and scalable presence in the online grocery marketplace,” also saw M&S take over Waitrose as the grocery supplier for Ocado.

But it was expensive; The initial consideration of £562m alone valued Ocado Retail at £1.12bn. For comparison, the Walker family acquired full control of Iceland, which has a similar UK market share of around 2 per cent and comparable annual sales, with an implied valuation of less than £200m just one year. after. In addition to the rights issue, M&S cut its dividend by 40 percent to help foot the bill.

During the pandemic, Ocado Retail was profitable but not scalable: it was unable to expand capacity fast enough to take full advantage of growing demand.

More recently, as the online shopping bubble of the pandemic has deflated, Ocado has found himself with excess capacity and losses. His contribution to M&S’s latest results was £29.5m; Barclays analysts expect the losses to continue for the next two years.

The company also requires financing and has withdrawn £30m from M&S as part of a shareholder loan, with additional outflows of “up to £70m” possible in the current year.

Machin has pointed to initiatives to improve Ocado Retail’s performance, including adding more M&S lines to its ranges and increasing collaboration in areas such as logistics and marketing. But Ocado Retail has its own board, and Ocado has the deciding vote on its CEO, so fixing the company isn’t entirely within his gift.

That all changes next summer, when under the terms of the JV deal, M&S can choose to consolidate Ocado Retail’s results into its own.

This may be why Machin says he remains “very confident” that it will all pay off in the end. And for the moment, enough is working at M&S ​​(its shares of it rose 11 percent on Wednesday after its beating-forecast results) to earn some goodwill in the market.

But M&S ​​shares have still underperformed almost every other major UK retailer, even ignoring dividends, since the Ocado Retail deal was announced in February 2019.

As they wait for payments to resume, shareholders may feel entitled to wonder whether M&S could have achieved the £600m sales it made to Ocado Retail last year through a simple supply arrangement rather than a joint venture. increasingly expensive.