Ocado's Major Kroger Deal May Open Up M&A Potential: Street Wrap

(Bloomberg) -- Ocado Group Plc’s agreement to license its home-delivery technology to U.S. supermarket chain Kroger Co. is the online grocer’s biggest deal so far, and a “materially larger” pact than Bernstein’s expectations. Kroger taking a 5 percent stake in Ocado may also pave the way for M&A options in the future, according to Berenberg.

The shares soared as much as 51 percent to a record high, adding about 1.8 billion pounds ($2.4 billion) to the market value and making the company a potential candidate for inclusion in the FTSE 100. Ocado has long been a target for short sellers, although bearish bets have been tapering since the U.K. company clinched a technology licensing deal with French supermarket operator Casino Guichard Perrachon SA in November. Short interest was at 9.9 percent of shares outstanding on May 15, down from a record high of 23.5 percent in March 2016, according to IHS Markit data.

Barclays, James Anstead

(Equal-weight, PT 265p)

Agreement with Kroger seems very well developed, even though it hasn’t been fully concluded. Ocado now has “an extremely credible partner” in the world’s biggest grocery market and the pact is an “unmitigated positive.”

Bernstein, Bruno Monteyne

(Underperform, PT 245p)

The deal with Kroger doesn’t come as a surprise, but is “materially larger” than Bernstein had expected, with the potential for up to 20 customer fulfillment centers compared with just the one that Bernstein had envisaged as a starting point. Kroger taking a 5 percent stake in Ocado gives the U.K. company the capital it needs to continue building other customer fulfillment centers.

Berenberg, Dusan Milosavljevic

(Hold, PT 286p)

Thursday’s announcement is a “more major positive” than previous deals, because Kroger is one of the largest food retailers in the world and the agreement for multiple customer fulfillment centers seems to be under favorable terms. Kroger buying a stake in Ocado may be seen as a move that could potentially open up long-term M&A optionality.

Goldman Sachs, Rob Joyce

(Neutral, PT 540p)

The market will largely view Thursday’s announcement as incremental, because it doesn’t preclude more deals outside of the U.S. and also because Kroger could potentially commit to more than 20 customer fulfillment centers, given its size. Goldman values each 1 billion-pound customer fulfillment center that Ocado agrees to supply at 26 pence a share, meaning that 20 customer fulfillment centers from Kroger would be equivalent to 182 pence a share.

Shore Capital, Greg Lawless, Clive Black

(Not rated)

Ocado should be commended for its “significant potential deal” with Kroger, but Shore questions the materiality of the international deals and when they will make a fundamental difference to both revenues and earnings. Kroger buying new shares in Ocado will also dilute earnings.

--With assistance from William Canny

To contact the reporter on this story: Lisa Pham in London at lpham14@bloomberg.net.

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Paul Jarvis

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