If Ocado’s reasons for tapping shareholders for £575m sound familiar, that’s because they are. Part of the explanation of the need for more cash was identical, word for word, to the description given in June 2020 when the online grocery firm raised £657m in equity plus £350m in debt. The extra money will allow Ocado “to capitalise on the opportunity set over the medium term”, said the statements, then and now.
When will “the medium term” actually arrive? And is it the same “medium term” as was imagined two years ago? Well, there is progress of a sort in that Ocado now offers a rough definition of what it means. In a City presentation last month, it talked about “four to six years” as the “midterm” and said the path led to pre-interest, tax and amortisation earnings of more than £750m, which would be a mighty leap from the £61m reported on the same basis for last year (and which became a thumping loss of £177m at the pre-tax level).
And, yes, one can see how the big leap forward is meant to happen. The pipeline of projects, for which the cash is required, compromises 58 robot-filled warehouses for overseas supermarket chain partners. There were just 10 depots in operation at the end of the last financial year. So, all being well, Ocado should have a very different financial profile in half a decade’s time when it is collecting its contractual cut from getting the warehouses open and operating.
It is hard to believe, though, that Ocado always intended another cash-call of this size at this stage. Last time, the stars aligned as lockdown conditions inflated e-commerce valuations; Ocado was able to issue new equity at £19.60 a share. Now the buzz has faded and the new stock is being printed at a more humble, and dilutive, 795p. It would have been better to go the whole hog last time.
Still, the latest fundraising is definitely the last, says Ocado. Long-term shareholders must pray that it is case. They have funded the company’s cash consumption for 20 years on the promise of spectacular returns eventually. This time “the medium term” needs to happen.
Bidders remain for UK train companies despite strike
Have the rail strikes derailed the mini bid-frenzy for UK train operating companies? Not at all. Go-Ahead, operator of the UK’s biggest commuter rail network, Govia Thameslink Railway, is still planning to sell itself to an Australian bidder.
Over at FirstGroup (Avanti on the west coast, Great Western Railway, South Western Railway and TransPennine Express), a £1.2bn offer was rejected a fortnight ago but, note, Miami-based fund I Squared Capital made its move in full knowledge that strikes were possible.
A short-term (we hope) industrial dispute doesn’t necessarily change a company’s long-term value, of course. But there’s probably another factor at work here: via their new fee-based management contracts, train operators are well insulated financially from upsets. Look at how FirstGroup described its new three-year contract at GWR the other day: the Department for Transport “retains all revenue risk and substantially all cost risk”.
Not all rail contracts are the same but the basic format sees the operator get a fixed fee equivalent to 0.5% of the cost base. So whatever pay deal on the railways eventually emerges, it should be reflected in the calculation of operators’ costs. The bottom line is that it’s now quite hard to lose vast sums as a train operator.
Two conclusions follow. First, bidders are mostly excited about the buses, not the trains, at transport groups such as Go-Ahead and FirstGroup; the public spending profile for buses is far more attractive. Second, ministers should not pretend that the government is only a minor player in the railway dispute: it is signing cost-based contracts and stands full-square behind them.
Rolls-Royce’s lump sum for low-paid workers could set trend
Meanwhile, Rolls-Royce provides an interesting test-case in pay negotiations during a cost-of-living crisis. An inflation-matching pay award is impossible, says the company, so it’s offering a £2,000 lump-sum to 11,000 shop-floor workers and 3,000 junior managers on top of a 4% pay rise. Lloyds Banking Group also gave a lump-sum, to the tune of £1,000 for lower-paid staff, so a trend seems to be emerging.
Note, though, the union’s response at Rolls: “The revised offer still falls a long way short of the cost-of-living crisis claim submitted by our members and their expectations,” says Unite. In other words, one-off unconsolidated awards may not always provide a quick fix in inflationary times. If Rolls’ offer goes to a vote, the outcome will be revealing.