Ocado's Scandi Win Can't Hide Its Need for a Buyer

(Bloomberg) -- Ocado Group Plc has extended its run of good news. The risk is that this tips over into a Scandi drama.

The online grocer said on Wednesday that it had agreed to license its technology to ICA Gruppen AB, Sweden's largest supermarket network. The deal represents Ocado's third with an international retailer in six months.

It shares many similarities with the arrangements struck with France's Casino Guichard-Perrachon SA and Canada's Sobeys Inc. in January.

But there is one crucial difference: ICA is an organization of independent retailers that compete against each other on price.

This isn't unusual in Europe. Ocado estimates that of the top 20 food retailers there, seven operate in this way.

This complicates things a bit for the company, as it must build micro-sites for each individual retailer. But if it can crack this problem, that increases the universe of retailers that could hand it big contracts.

Ocado hasn't disclosed how much ICA will be paying it, but it says the amount reflects the trickier nature of the project. The deal will have little impact on earnings this year.

But there is one drawback to this welcome turn of events.

All of these contracts require capital investment. For each new deal, Ocaco estimates that at its most intensive spending can reach 30 million pounds in a single year (usually the third).  After raising 143 million pounds ($195.1 million) through a share sale in February, it should have enough in its coffers for this and a few more. But after that, it will likely have to tap investors again. 

Big spending for online retailers isn't confined to Ocado. Everyone from fast-food platform Just Eat Plc to fashion retailer Asos Plc is investing heavily.

But Ocado is more exposed than most. Its model has always been capital intensive, as it features big state-of-the-art warehouses. Each new partner needs a copy of this arrangement.

The shares are around 2 percent higher, reflecting in part that investors appreciate that Ocado will have to shell out cash to make this work. 

They have more than doubled since Ocado announced the Casino deal in November, and on a multiple of enterprise value to future Ebitda they are ahead of Amazon.com Inc. This implies that the company can not only score these flashy wins, but fund them, too. That seems a tall order.

There's one saving grace, however. Ocado has long been seen as a takeover target for a food retailer keen to expand its online operations. So far, that has failed to come to fruition. But the wave of merger and acquisition activity in the U.K. supermarket sector, most recently J. Sainsbury's 7.3 billion pound purchase of Asda, could yet stoke interest from a buyer. 

But without a bid, increased competition in its home market and a continued need for capital mean Ocado could start to look more like Swedish noir.

To contact the author of this story: Andrea Felsted in London at afelsted@bloomberg.net.

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net.

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