As a general rule, when one company bids for all or part of another one it is shareholders of the target company who come out better. So it has proved with the plan for Marks & Spencer (MKS) to take a half share in the UK retail division of Ocado (OCDO), which will deliver M&S food to customers’ homes.
The deal, in principle, makes sense for both sides. Ocado was originally the inhouse delivery service for Waitrose but it has already added food and non-food items from supermarket Morrisons to its deliveries and each new partner potentially adds value and produces economies of scale. In any case, its contract with Waitrose expires in September next year and there is no guarantee that it will be renewed. It makes sense to act sooner rather than later.
M&S does have an online service but it needs to get food deliveries direct to customers rolling to capitalise on what has been its most successful division. Food has propped up the struggling clothing and homewares side for several years but its growth is now showing signs of faltering.
M&S chief executive Steve Rowe reckons the deal is win-win. It’s certainly a win for Ocado, which has a major new partner just as fears are growing that the contract with Waitrose will not be renewed. Finding a replacement deal is a great boost and it collects £750 million for its pains.
However, M&S is stumping up what sector analysts consider to be a rather high price for its stake and 50-50 joint ventures, where neither side has control, are notoriously fraught. Worse, the High Street giant is cutting its dividend by 40% and it plans a £600 million rights issue to fund the deal. That sounds more like lose-lose rather than win-win.
And it’s a long wait for the annual £70 million cost savings that Rowe reckons the deal will produce, as the joint venture doesn’t start for another 18 months.
M&S shares slumped 12.5%, by 37.8p to 265.4p. Those who bought ahead of the announcement, when the shares added 15p in two trading days on hopes that this anticipated deal would be indisputably great, were given a dose of reality.
Ocado in contrast added 29p, a gain of 2.9%, with another 11p added the following day. The shares now trade at around £10.30 but they were a whole £1 more expensive last July so they could well edge a little higher. I’ve never been a great fan of either company as an investment; as things stand I much prefer Ocado to M&S.
National Express on the Move
National Express (NEX) is the best transport company of any description on the London Stock Exchange to hold shares in – and I do.
Figures for the 2018 calendar year show healthy increases in revenue, margins, profits and cash flow, with organic growth in every division boosted by acquisitions and tight control of costs. The dividend total is raised 10% to 14.86p, giving a decent yield of 3.54%.
Chief executive Dean Finch reckons that "these record results again demonstrate the benefit of our increasingly diversified international portfolio of industry-leading businesses”. That has not been true for other UK bus and train companies that have tried unsuccessfully to expand internationally so he must know something that the rest of the industry doesn’t. Compound growth of 20% in profits over the past five years speaks for itself.
Last year every division saw revenue growth accelerate in the second half and a strong start has been made to 2019.
The shares slipped back 1% from an all-time high of 423p but as profit-taking goes that was a very mute reaction. Despite an upward run since mid-October 2014 the shares are still worth considering as a buy. They have balked three times at 420p in the past nine months but will surely cross that barrier this year.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar.
