Margareta Pagano: Was I right about the Ocado listing? I was – and how
When is a float not a float? When it's a rights issue by an outfit whose founding investors are fleeing
Sunday 18 July 2010
So many friends have been questioning my advice not to touch Ocado's shares ahead of next week's £1bn-plus listing that I feared I'd missed something – like a forecast for profits or dividends perhaps?
To get a second opinion, I phoned a friend, one of the City's finest corporate brokers who has worked on more listings than I've had hot dinners.
His answer took a second: don't touch it with a barge pole, adding: "This is not a float but a rights issue in disguise. If the Ocado management team needs the money to stay in business, they should be offering new shares, diluting their own company. That, after all, is what the stock market is about – a mechanism to raise new capital, not make a fortune for its founders." Phew!
There are just too many unanswered questions about Ocado despite a 300-page prospectus, 18 of which set out the associated risk. The company, started by three Goldman Sachs bankers a decade ago, has spotted a niche and has seen sales rise, but it has yet to make a pre-tax profit and doesn't forecast one. As Ocado's directors put it, the only thing standing between "Ocado and profits is scale". Doesn't sound convincing to me. Small investors are warned that dividends will not be paid for some time either.
There also seems to be confusion about why they want to raise the new £200m. Ocado said originally it was to build a Midlands warehouse. But now the prospectus says it will find extra funds to do this. Sounds odd to me.
Most of City's top fund managers have also got the heebie-jeebies, arguing the shares are way overpriced at the 200p to 275p range, putting a "base" share valuation for the company at between 128p and 135p.
More disturbing is the number of Ocado founding investors – individuals and private equity boys – selling out. As my broker friend put it, this makes new investors nervous as they fear the private equity ones are off because they have already "raped and pillaged" the business.
That's probably a bit strong for Ocado, but it's worrying that investors want to sell 155 million shares which would net them £427m at the top price. And why should new investors want to pay for chairman Michael Grade to get a £100,000 float bonus ?
To save face, analysts say that if the price is cut to between 160p and 180p, the float should get away comfortably despite some dilution to existing shareholders. This seems a more realistic price, one at which even my friends could afford a long-haul punt.
But the broader question raised by Ocado's float is why the Financial Services Authority – the listing authority – ever let it through. With the FSA about to be broken up, it's not been decided yet where the listing authority should be housed.
The Treasury is due to seek the City's views on where it should go when a consultative document on the FSA and Bank of England reforms is published in the next fortnight. Among the choices being considered, I'm told, are the London Stock Exchange and the Financial Reporting Council. If the LSE had been running the show, Ocado would have been unlikely to qualify for a float, as the exchange's criteria were so tough. Put that way, the choice is obvious.
Burberry unbuttoned: Sun shines on luxury raincoat maker
It's easier to remember triumphs than disasters, so I'm delighted to report that shares in Burberry haven't stopped motoring since I tipped them last year at around 400p. On Friday the shares rose another 9p, hitting 799p and valuing Britain's luxury retailer at £3.4bn. Against the odds, its chief executive, Angela Ahrendts, has turned the raincoat maker's chavvy image around, making it a luxury brand again; one which has made a real stamp in overseas markets such as China – which is rare for a British company. Ahrendts disclosed another stellar first quarter this week, announcing sales up 24 per cent, and plans for another 20 shops in America and 30 in Asia. And Ahrendts is clearly so confident of future growth that she's also just spent £70m on buying back the 50 franchised stores across 30 cities in China to bring the empire firmly under her control. The move, she says, will add £20m to group profits in the next year. If she's investing in the Burberry name, then maybe it's still time to buy?
A new era of commercial imperialism would do wonders for our trade
George Osborne came up with the most astonishing fact at the Treasury Select Committee last week which I had to check out. But he's right: the UK exports more to Ireland than it does to Brazil, Russia, India and Russia – the Bric countries. So it's no surprise that the Chancellor, together with the Prime Minister, David Cameron, and the Foreign Secretary, William Hague, are making such a big play about pushing British trade into countries like the Brics where we don't sell anywhere near as many of goods as we should. It's in the Brics where the emerging middle classes gobble up the things which we do still make rather well – see the Burberry story above.
This is also why Cameron and his team are still trying to find a high-profile businessman to fill the slot of trade minister to take over from Lord Davies, the former Standard Chartered chairman, after a number of top figures turned down the role, including Sir John Rose of Rolls-Royce and Dick Olver of BAe.
But I wonder whether the PM is missing a trick here; it's a tough role for a serious industrialist to fill, and often they are not very good at it, because if they are really top of class, it's natural they would prefer to stay in business. The role is not paid much and there's all the messy stuff of having to declare interests, or even be put in a blind trust. Instead, Cameron should consider appointing a retired ambassador; Sir Stephen Wright, ex-ambassador to Spain and now at the City's trade body, and Sir David Wright, ex-ambassador to Korea, come to mind. At the same time, he should be pushing our current ambassadors to start working a bit harder – trade is what they have been doing since the 17th century and a new sense of commercial imperialism might even liven up the Foreign Office – and certainly put paid to the many critics who think it should be closed down.
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