Ocado May Sell and Lease Back Warehouse to Avoid Covenant Breach

Ocado Group Plc (OCDO), the U.K. online grocer, will consider selling and leasing back a soon-to-open warehouse should it be necessary to avoid breaching debt covenants, Chief Executive Officer Tim Steiner said.

“It is something we will consider,” Steiner said of the building in Dordon, central England, that will become Ocado’s second distribution hub when it opens in the first quarter of 2013. Still, Ocado isn’t close to a covenant breach, he said.

Brokerages UBS AG and Panmure Gordon & Co. have both raised concern over the company’s financial position as it spends money on the new warehouse while sales growth moderates. Ocado said in March that a “material reduction” in forecast earnings could lead to a breach of covenants under a 100 million-pound ($162 million) credit facility, the biggest of the company’s debts.

The company’s sales growth slowed in the third quarter as the London Olympics weighed on demand, Ocado said today. Gross revenue rose 9.9 percent from a year earlier, compared with 12 percent growth in the first half. That missed the 12 percent average of seven analyst estimates compiled by Bloomberg.

Ocado fell as much as 7.1 percent in London trading and was down 3.5 percent at 64.85 pence as of 10:09 a.m. The shares were sold at 180 pence each in a July 2010 initial public offering.

“We now believe that Ocado’s days as a public company are limited,” Philip Dorgan, an analyst at Panmure Gordon, said in a report today. He has a sell recommendation on the stock. Slowing sales growth “means that it is possible that Ocado could breach its net debt to Ebitda covenant this year.”

Price Promise

Steiner said he expects an increase in the rate of sales growth in the fourth quarter as Ocado’s new “Lower Price Promise” campaign and an extended range attract customers.

“We think that will give us a boost for the back end of the fourth quarter,” the executive said.

Ocado is investing about 210 million pounds building its second warehouse in Dordon, near the English city of Birmingham, to solve capacity shortages which it blames for limiting its sales growth as it is unable to fulfil demand.

A sale of the freehold at Dordon would provide liquidity and “would not compromise Ocado’s business model significantly,” James Anstead, an analyst at Barclays Capital with an equal weight recommendation, said in a report last month. “Options are clearly open to it.”

Now that the site is constructed and in a phase of testing and commissioning, “we don’t need to own that building anymore, so we could look at doing some form of ground lease or some form of sale and leaseback,” Steiner said. The retailer has a 999- year lease that it pays 2 pounds a year for, the CEO said.

To contact the reporter on this story: Sarah Shannon in London at sshannon4@bloomberg.net.

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net

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