Ocado is expected to press ahead with its planned IPO later this week despite growing disquiet in the City about the true value of the grocery delivery group and its business plan.
Shares in the company are likely to begin trading on Wednesday, valuing Ocado at about £800m, after management meetings with investors in Amsterdam and London today and tomorrow. It is thought that Ocado, which delivers Waitrose food to online customers, still hopes to hit the upper end of the IPO range of £1.1bn, but has accepted that getting the deal away in choppy markets will be a success.
The listing, which is being managed by Goldman Sachs and JP Morgan Cazenove, has been dogged by what one source described as a "wall of negative comment". A number of analysts have questioned the group's funding, the sustainability of its business model, and the incentives that are likely to be offered to management.
It also emerged at the weekend that Ocado's bankers have warned the groupthat the take-up of shares by its own customers, an offer that closed last night, is likely to disappoint. The group had hoped to raise as much as £50m from clients, but is now likely to have to settle for closer to £10m.
Ocado has never made a per-tax profit during its 10-year history and its IPO plans have attracted scorn from a number of analysts who argue that the group's projected valuation is hugely over-estimated. Last Friday, Dave McCarthy, an analyst at Evolution Securities, said: "There are indications that the business model may be flawed in that it requires a lot more capex and scale before it makes a good return. But the addition of this extra capacity puts extra costs on the business which pushes the break-even point out further. Meanwhile, Ocado will have to face its biggest competitor in Waitrose as it enters the market. Waitrose and Ocado will be fishing in the same market niche.
"Investors should be wary of growth projections that cover the entire market," Mr McCarthy added. "Ocado is not a mass-market player the way that Tesco is and is much more in line with the Waitrose position."
Ocado hit back yesterday, arguing that Mr McCarthy's analysis failed to note that the group has a £100m capital expenditure facility at its disposal. "We have great respect for Dave as an analyst but his latest note on Ocado seems to ignore the fact that we have a £100m capex facility – which is clearly explained in the IPO prospectus," a spokesman said. "Post-IPO, Ocado will have adequate funds to give substantial headroom to a working-capital forecast for two years but also sufficient funding to build fully CFC2 [a new distribution centre] to £1bn in sales capacity. We have no expectation of further funding." No reference was made to the competitive threat presented by Waitrose.
Rival experts at both Goldman and JP Morgan have pointed to Ocado's advantages, including its "superior" offer to customers. They argue that the group will be profitable by the end of next year. It is thought that a trip to the US to meet specialist technology investors has also steadied any management nerves after they received widespread support.
Regardless of the merits of Ocado, the timing of the IPO has also raised questions. Volatile markets last week ended the hopes of a listing by Fairfield Energy, the North Sea oil and gas-exploration group , which abandoned plans for a £325m float. The pipeline for new listings is also thought to be thin.
Groups such as the airline-ticketing outfit Travelport and Legoland owner Merlin Entertainment, which are both private equity backed, earlier this year pulled plans to list after receiving only lukewarm support.