Ocado's Found a Silver Lining in Brexit
Ocado hasn't had much to smile about lately.
The online grocer has so far failed to clinch the long-promised deal to run the grocery operations of a big overseas supermarket, or even better still, be bought by one.
But Brexit -- or to be more precise, the market fallout from the referendum result -- might just help it to finally get that delivery from warehouse to front door.
Because the rout in the pound has just lowered the cost an overseas supermarket would pay to have Ocado run its online shopping business. And for long-suffering investors, the cost of buying the entire company just got cheaper, too.
Ocado's ambition is to be the Amazon of British grocers, providing software and infrastructure to process food deliveries for anyone. It's dangled the prospect of a partnership with a U.S. or European grocer in front of shareholders, but embarrassingly, nobody has signed up.
Part of the reason is that Morrison, which was the first supermarket to outsource its online grocery business to Ocado, has made no secret of the fact that it wants to get better value for money from the arrangement.
It's been great for Ocado, contributing 44 million pounds ($58.6 million) of revenue and almost 9 million pounds in fees in the first half of its financial year, the company said Tuesday. That's a big share of its 584.2 million pounds of total revenue and 40.4 million pounds of underlying profit.
But the chief executive of Morrison, David Potts, has indicated the deal isn't profitable. The terms are under negotiation, and are likely to become more favorable to Britain's fourth-biggest grocer by market share.
The fact that the arrangement was so skewed in the first place sends a poor signal to prospective partners of Ocado.
The slump in sterling might just help it get around that problem. The cost of an Ocado services contract for a U.S. or European supermarket has slumped compared with June 23, the date of the referendum. As for buying the whole company, that is now about 19 percent cheaper in dollars, assuming a 30 percent premium to the company's market capitalization.
It's a welcome development, because Ocado could certainly could do with some good news. Other troubles have justifiably suppressed valuations.
It's facing the onslaught of Amazon Fresh in its London heartland. Compounding the threat, Morrison has made a surprise agreement to supply Amazon with food.
And in the background is the possibility of a messy divorce from upmarket supermarket Waitrose, whose products Ocado sells to its customers.
Shareholders have rightly punished Ocado, and the stock has lost about almost a quarter of its value since the beginning of April.
In a reversal of the trend of the past few years, Ocado's enterprise value to forward sales ratio now lags Amazon's.
Of course, the sting of Brexit could be full of other downsides for Ocado. It is loved by middle-class shoppers in London and the south east -- the sort that might be hit by any City job losses.
And it will have to be careful to manage any pickup in food price inflation to its benefit -- as Gadfly has argued, higher food prices could benefit grocers, but it's a tricky situation.
But given that Ocado's current order is packed full of problems, investors should welcome any circumstances that may ease that load.
--With assistance from Chris Hughes in London.
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