July 21, 2010 / 6:41 AM / 10 years ago

Ocado shares trade below IPO price

LONDON (Reuters) - Online grocer Ocado priced its initial public offering at the bottom of a reduced range and its shares dropped in early conditional trading as sceptics continued to question its valuation.

File photo shows an Ocado delivery driver with branded van. REUTERS/Newscast

The shares were marked down as low as 163.25 pence early on Wednesday, after they were priced at 180 pence.

Only on Tuesday, Ocado (OCDO.L) lowered the price range for its flotation to between 180 and 200 pence from an initial 200 to 275 pence.

“Even at the revised valuation, the company is still overvalued and expensive. We would not be surprised to see hedge funds shorting the stock,” said Amisha Chohan, an investment analyst at HB Markets.

Ocado, which sells the products of upmarket grocer Waitrose, is enjoying soaring sales at Britons flock by buy groceries on the Internet.

But it has yet to make a pretax profit and some analysts question whether its model of filling online orders from a central depot can be as profitable as filling them from stores, as done by rivals Tesco (TSCO.L), Asda (WMT.N) and Sainsbury (SBRY.L).

Ocado, founded in 2000 by three former Goldman Sachs bankers, raised 200 million pounds in the IPO to pay down debt, expand its existing warehouse and start building another facility.

At the issue price, the group had a market value of 937 million pounds, still way above some analysts estimates of no more than 500 million pounds.

At 8:35 a.m., Ocado shares were indicated at 164.75 pence, down over 8 percent from the issue price and compared with a 1.5 percent rise on the FTSE-midcap index .FTMC they will join.

Unconditional trading in the shares starts on Monday.

VALUATION

“It is astonishing how high a price is being paid for Ocado,” said Arden Partners analyst Nick Bubb.

Ocado’s enterprise value — equity plus debt — is equivalent to 41 times Bubb’s forecast for earnings before interest, tax, depreciation and amortisation (EBITDA) for the year ending November 2010, falling to 28 times the following year.

That compares with fast-growing online fashion retailer ASOS (ASOS.L), which is trading at 23 times Bubb’s forecasts for the year ending March 2011.

Ocado’s existing investors, mainly the pension fund of Waitrose parent John Lewis and banking group UBS UBSN.VX, raised about 154 million pounds from selling shares.

“The fact that our IPO completed successfully in very difficult markets is an endorsement of the long-term growth potential offered by Ocado,” Chief Executive Tim Steiner said.

Investors have driven a hard bargain with new issues this year amid turbulent financial markets. Last week, oil and gas firm Fairfield Energy pulled its planned flotation, while others, like Ocado, have had to reduce their price.

Ocado founders Tim Steiner, Jason Gissing and Jonathan Faiman are retaining stakes worth about 130 million pounds in total. Gissing and Faiman both sold about 2 million shares.

In total, directors will own about 20 percent of the firm.

Ocado is being advised by Goldman Sachs (GS.N), UBS and JP Morgan Cazenove, as well as a junior syndicate of five banks, which will all share about 15 million pounds in fees.

Editing by Will Waterman, Hans Peters and Karen Foster

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