Ocado shares slump on market debut

Ocado’s flotation price is lower than expected. Photograph: Justin Kase/Alamy

Shares in Ocado slumped to 11% below their reduced flotation price this morning as the online retailer received a lacklustre welcome on its stock market debut.

Ocado’s co-founder and chief executive, Tim Steiner, was forced to defend the company’s handling of the flotation process and said investors had given the share issue an “extremely positive reaction.” However, shareholders signalled their doubts about the 180p float price when official trading began this morning, marking the shares down to 160.75p – nearly 40p below the lowest expectation the board had when they started the flotation process earlier this year. It means the online grocery business is valued at under £1bn, roughly a third below the original asking price.

Steiner gave an impassioned defence of Ocado’s prospects this morning as he criticised some brokers for interrupting the pre-float blackout period to issue research that questioned the planned float price. Ocado has yet to make a profit and some analysts have suggested that £650m is a more realistic valuation for the business. In an increasingly tetchy conference call with reporters, Steiner denied that he was sounding “chippy” about the negative coverage from the press and the City in the run-up to the float.

“I might be sounding a little bit tired,” he said. “I am massively excited about the future for Ocado and if I am in the slightest bit jaded people have lost focus on the fact that we have floated to build the business and raise jobs in the UK.”

Hedge funds blamed

Ocado, founded by three former Goldman Sachs bankers a decade ago, had originally set an indicative price range for its shares of between 200p and 275p which would have valued the firm at up to £1.35bn. But potential investors balked at such a high asking price for a company that has yet to make a profit. Steiner, who now owns 5.4% of the company, said he had not sold any shares in the flotation and would not have sold any even at 275p.

Steiner said he was not deflated by the market reaction and said a number of hedge funds had affected early trading.

“I am not dissappointed. I am not overly surprised that a couple of hedge funds wanted to have a pop when it opened.”

Yesterday, just hours before the final deadline for potential investors to put up their cash, the directors were forced to slash the price. The dramatic U-turn came after two weeks of denials that the flotation plan was in trouble.

The company said today that its backers – including the three former bankers and the John Lewis pension fund – have sold over 85m shares, worth £154m – slightly less than initially expected.

The company, meanwhile, is selling just under 120m shares, raising £214m before expenses. Some 60% of the money is believed to be coming from investors in the US and Asia.

While the price is a disappointment, the successful flotation means that Ocado’s chairman, former ITV boss Michael Grade, has been awarded a bonus of £100,000, which the company said he has elected to receive in shares. Before the flotation some doubts had been raised about his suitability by investors who said that his track record was not up to scratch, meaning that there should be “a Grade discount” applied to the flotation.

As a result of the 11th-hour price cut Ocado shoppers who signed up to buy shares in the float have now been handed a no-lose guarantee. The deadline for customers to invest up to £12,000 in Ocado shares passed at midday last Sunday, but they must now all be sent a supplement to the prospectus. As a result they have been granted an extension until Friday to decide whether to press ahead with their investment.

Elusive profits

Ocado confirmed this morning that Ocado’s chief executive Tim Steiner has not sold any of his shares. Steiner had been planning to cash in shares worth several million pounds, but believes the lower price undervalues his holding.

His two fellow founders, Jason Gissing and Jonathan Faiman, however, have taken money out. Gissing is Ocado’s director of people and culture, while Faiman has left the business. The company has already soaked up investment of more than £350m, but has never made a profit in its 10-year existence. Last year it lost £25m on sales of £437m.

Potential investors have been concerned with a raft of risks – from the fact that the current warehouse is operating at capacity with no sign of profit to worries that Waitrose is going head-to-head with Ocado with its own delivery service in London next year. It was previously prevented from taking on Ocado by a non-compete agreement.

At the last fundraising, in September 2009, when former US vice-president-turned green campaigner Al Gore took a 1% stake in the business, Ocado was valued at little more than £500m.