Ocado's new banking deal gives firm time to grow

LONDON Mon Nov 19, 2012 12:13pm GMT

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LONDON (Reuters) - British online grocer Ocado (OCDO.L) said it will raise 36 million pounds ($57 million) through a placing of new shares as part of a deal with lenders that will see its debt facility extended.

Ocado shares, which nearly halved in the past six months on fears it could breach its banking agreements, leaped as much as 32 percent on Monday as investors bet the new lending deal would give management more time to prove its business model can work.

The stock was up 15.05 pence at 75.6 pence at 1130 GMT, valuing the business at 392 million pounds.

The firm, founded in 2000 by three former Goldman Sachs bankers and floated at 180 pence a share in 2010, has polarised opinion like few other market debutants.

Fans point to rapid growth in online grocery sales and high customer service ratings. Sceptics say its model of filling orders from central depots will never be as profitable as online operations at established grocers, which mostly pick orders in store and are seeing faster online sales growth than Ocado.

"Ocado is still operating an inefficient model, growing below City expectations and its multichannel competitors," said Panmure Gordon analyst Philip Dorgan, a long-time Ocado bear.

"That said, the monkey is off their back and management now has considerable breathing space."

Chief Executive Tim Steiner denied the firm would have breached its banking covenants if it had not agreed a new deal with banks. "100 percent categorically we would not have breached the agreements," he told Reuters.

Ocado, whose range includes products supplied by upmarket grocer Waitrose JLP.UL, said existing lenders Barclays (BARC.L), HSBC (HSBA.L) and Lloyds (LLOY.L), had agreed to extend the maturity of its existing 100 million pounds capital expenditure facility by 18 months to July 2015.

SALES GROWTH PICKS UP

Chief Financial Officer Duncan Tatton-Brown said covenants on the new deal were fundamentally the same as the previous deal for 2013 and would become less onerous in subsequent years.

The lending deal is conditional upon Ocado placing 55.9 million new shares representing 9.99 percent of existing capital, to existing shareholders, at 64 pence a share - a premium of 5.7 percent to Friday's closing price of 60.55 pence.

Ocado said a wide spectrum of large shareholders, including board members such as Steiner, would be backing the placing.

Ocado's gross sales rose 11 percent in the 14 weeks to November 11 and were up 13.7 percent in the last six weeks of the period, as the firm benefited from the extension of its range towards 30,000 lines and the introduction of its "Low Price Promise".

Sales growth had slowed to 9.9 percent in the third quarter after trade was impacted by celebrations to mark Queen Elizabeth's Jubilee and the London Olympics.

"The chitter chatter in the market has been that we're seeing declining growth... What this (statement) is highlighting is not only has the quarter been stronger than the previous quarter but as we predicted it was going to be a back-ended quarter which is actually the most important point of the year," said Steiner.

He said he expected stronger sales growth until February next year when the firm will start to fulfil customer orders from a second distribution centre. After February he anticipates a further acceleration, as marketing is stepped-up and the firm's non-food offer expanded.

(Reporting by James Davey; Editing by Kate Holton and Tom Pfeiffer)

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