M&S expects discount on Ocado investment after performance decline


Marks and Spencer expects a substantial discount to the final price of its investment in Ocado Retail after the online grocer’s performance deteriorated.

The notes to the group’s half-year accounts, published this week, show that MRS reduced the ‘fair value’ of the amount still to be paid to Ocado for its half-share in the joint venture to £60.5m, from £172m last year. Only around £17m of that reduction is the result of payments being made on schedule.

Fair value is a current currency estimate of the liability based on the probability that the objectives will be achieved. It generally changes by a small amount during each accounting period depending on the discount rate used, the payments made and the time remaining until the remaining payments are due.

M&S said this year’s much larger adjustment reflected “current market uncertainty”, including the latest trade update from Ocado Retail and added that it was “discussing the matter with Ocado Group and a range of outcomes are possible”.

MRS acquired a half share in Ocado Retail in 2019 for an initial amount of £562 million in cash and deferred consideration of up to £187.5 million plus interest. The deferred consideration is subject to three performance conditions.

Two of them, related to the delivery of order capacity, have already been met and £33.8 million has been paid. But the largest item – £156 million plus interest – is due in March 2024 and depends on Ocado Retail’s adjusted profit before interest, tax, depreciation and amortization for the year to November 23.

M&S said the result is binary; if the ebitda target, which has not been communicated, is reached, then the payment is made, otherwise no consideration is due.

The joint venture’s performance has deteriorated in the current year as buying habits normalized after the peak of the coronavirus pandemic, costs rose and customer budgets came under pressure.

In its latest update in September, the online grocer said it expected lower sales in the current year for the first time in its history. Ocado Retail has yet to release guidance for 2023, but analysts polled by Bloomberg expect the unit to report ebitda of around £43m – better than the £13.8m expected for the current year, but still only £8m more than the £35m recorded in 2019, the year the company was founded.

Mel Smith, managing director of Ocado Retail and former M&S insider, left the company in August and was replaced by Hannah Gibson.

M&S recorded a small loss on its stake as part of its half-year results and chief executive Stuart Machin alluded to dissatisfaction with the unit’s performance, saying its “quality, service and of market leading choices supported by M&S food has been diluted”. .

Both companies said the fair value write-down was largely an accounting technicality and was necessarily imprecise because the fiscal year in question had not yet begun. But M&S ​​chief financial officer Eoin Tonge also told analysts it was likely the group would have to pour more money into the business, likely in 2024.

“We always sort of assumed that we will have to do funding needs in Ocado. But obviously it becomes more realistic, given that the return to profitability takes a bit longer.


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