Why Amazon won t buy Ocado

If you believe current market talk, Ocado’s now infamous and over-due quest for a game-changing ‘technology’ deal may come to fruition, though perhaps not as it expected.

 

The stock saw gains as high as 20% on Tuesday, though had fallen for four straight sessions since last Wednesday.

That didn’t square entirely with a suggestion by the only major media source of Tuesday’s news, that speculation had been doing the rounds for days.

More precisely, investors have been aware of Amazon’s inception into the UK grocery market, albeit on an experimental basis, for months.

‘Amazon Fresh’ seemed to ‘soft launch’ a few stores in the UK late last summer.

It still operates no more than a couple of handfuls of stores in Britain and the US.

Not to underestimate Amazon’s ability to disrupt, but logistical challenges do abound selling food online.

Different supply chains, logistics, and temperature zones are required, picking and packing many more items, many of which need to be handled with a gentler touch than ‘general merchandise.’

It would probably take at least two years and perhaps five or more for Amazon to master the grocery delivery business in a materially accretive way.

 

 

These barriers to entry on the face of it play to a certain convenience in a potential ‘buy-in’ of the kind speculated.

On the other hand, why would Amazon bother to buy Ocado?

In fact, AMZN has in all probability begun to ramp up to a full UK e-grocery already.

In December, it said was “really happy with the early numbers” for Amazon Pantry, which doesn’t deliver fresh produce, yet.

“When we believe we have got the offer right, and the economics, we will roll it out internationally”, Amazon’s UK CEO Christopher North said the same month.

 

 

Turning to a different tack perhaps the fact that both the 15-year old UK e-tailer and the web conglomerate are running weak at the margin, makes talk of a deal more plausible.

Still, for the larger group, no one gives a truck, for well-rehearsed reasons.

 

Would Amazon spend (judging by relatively tame retail sector M&A multiples) as much as 9 times forecast 2015 Ebitda (£81.14m) —plus £175m debt, i.e.—about $1.3bn, to buy Ocado?

 

If so, the more diversified group would be buying-in annual sales growth compounded over three years of 16.6% whilst it has achieved almost 23% without Ocado’s help.

Finally, what about Ocado’s much-prized asset the Ocado Smart Platform (OSP)?

It is rightly the focus of much company stoked anticipation, as to when another large third party will license it in the same way Morrisons did, with game-changing results for the online group (namely its first ever full-year profit).

Again, the US giant probably has little need for another “complete end-to-end” “fulfilment solution”, comprising “fulfilment automation equipment and software”, etc., etc., etc, to quote from here.

 

 

OSP probably does remain the key for Ocado’s future profitability.

But a relatively medium-term horizon for a further contract to deliver it has become considerably more malleable.

“Frankly…whether we sign it on Dec. 31 or Jan. 1, it doesn’t actually matter,” said Ocado’s finance chief Duncan Tatton-Brown in December.

That’s a far cry from the ‘sometime in 2015’ guidance given previously.

That reality had apparently re-dawned on OCDO buyers towards the close of Tuesday’s session, with shares well off their best, though up 7%.

 

 

Likewise, our view of the stock hasn’t changed since Ocado’s last official update in December, ahead of Ocado’s full-year 2015 results scheduled to be released on 2nd February.

Till then, we think the shares will continue to struggle whilst cowed by the extension off July highs, particularly the 61.8% level at 308.3p.

100% of the move has supported the shares so far.

But inability to break higher within the pattern would suggest a return of the shares to lows not seen since October 2014, as per Monday.

Of course the stock touching that level had absolutely nothing to do with the emergence of unsubstantiated talk a day later.

Either way, expect trade close to but below resistance at 298p to continue to be sold.

 

 

 

 OCADO DAILY CHART

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