Ocado shares tumble by 7 per cent on debut

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The Independent Online

The online grocer Ocado faced further humiliation yesterday on its debut on the stock market, as its chief executive launched a vigorous defence of the business.

In a further blow for Ocado, a number of City analysts greeted its initial public offering with sell notes, with Collins Stewart placing a valuation of just 122p a share on the company.

Shares in Ocado, which was forced to slash its flotation by nearly a quarter to 180p late on Tuesday, closed down by a further 7 per cent at 167p on its first day of unofficial trading. But they staged a recovery in the afternoon after plummeting as low as 155p in early trading. Unconditional share trading in Ocado, which delivers Waitrose groceries, begins on Monday.

Greg Lawless, an analyst at Collins Stewart, said: "Like many, we are buyers of its service, but not the shares at these levels. We think the current price simply asks too much of the company in the next 10 years, especially bearing in mind the starting point."

Until the 11th hour on Tuesday, Ocado maintained it was confident of getting the float away at a price of between 200p and 275p, which would have valued the company at between £800m and £1.1bn.

The flotation of the online grocer has been one of the most controversial of the last decade and has divided opinion in the City – largely because Ocado has never made a pre-tax profit in 10 years. While Ocado had signed up an army of eight investment banks and their advisers to the float, certain institutions, such as Schroders, and analysts have been vocal in their opposition to its lofty valuation.

Ocado was established by three former Goldman Sachs bankers, Tim Steiner, Jason Gissing and Jonathan Faiman in 2000. Yesterday, Mr Steiner, the chief executive of Ocado, hit back at the recent barrage of criticism by saying: "We will see where it is trading in 24 months." He added: "We are all entitled to our opinions and my opinion is that we should be valued at more than 163p [the price when he spoke to reporters]."

In a show of faith, Mr Steiner dropped his plans to sell some of his shares before trading began.

Ocado also achieved its goal of raising £200m from the IPO to invest in the business and pay down debt after issuing more new shares.

It also emerged yesterday that Jorn Rausing, the TetraPak billionaire, has become the group's largest shareholder with a stake of more than 11 per cent. As expected, the pension fund of the John Lewis Partnership has slashed its shareholding from about 26 per cent to 10.36 per cent, which still makes it the second biggest shareholder. In total, existing shareholders made £155m from selling their shares, which was less than the forecast of £200m.

Just several thousand of Ocado's 100,000 customers eligible to buy shares did so before Monday and they now have until Friday to buy them.

Ocado will use the bulk of the funds raised to build a second customer fulfilment centre (CFC), likely to be in the Midlands, in addition to further investment in automated facility in Hatfield, Hertfordshire. It will invest an eye-watering £210m in the second CFC, which it needs to extend its coverage beyond 66 per cent of British households. However, assuming it starts building the site in the first quarter of 2011, it will not begin operating until the end of 2012 "at the earliest", according to its prospectus.

However, by getting away its IPO, Ocado has succeeded where other companies have failed this year. New Look, the fashion retailer, and Merlin Entertainment, the owner of London Eye, ditched floats earlier this year, and last week Fairfield, the oil and gas-exploration group, scrapped its IPO.

Ocado is growing rapidly and delivered a 181 per cent uplift in underlying earnings to £8m, on total sales up by 29 per cent to £230m for the 24 weeks to 16 May. While banks such as HSBC do not expect Ocado to make its maiden pre-tax profit until 2014, other analysts have pencilled in income next year.

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