Marks and Spencer is expecting a substantial discount on the final price of its investment in Ocado Retail after performance at the online grocer deteriorated.
The notes to the group’s half-year accounts, published this week, show that M&S has slashed the “fair value” of the remaining amount payable to Ocado for its half-share in the joint venture to £60.5mn, from £172mn last year. Only around £17mn of that reduction is a result of payments made under the agreed schedule.
The fair value is an estimate of the liability in today’s money based on the probability of targets being hit. It generally moves by a small amount in each accounting period based on the discount rate used, any payments made and the time left before remaining payments are due.
M&S said this year’s much larger adjustment reflected “current market uncertainty”, including Ocado Retail’s most recent trading update and added that it was “discussing the matter with Ocado Group and a range of outcomes is possible”.
M&S acquired a half-share in Ocado Retail in 2019 for an initial £562mn in cash and deferred consideration of up to £187.5mn plus interest. The deferred consideration is subject to three performance conditions.
Two of these, relating to delivery of order capacity, have already been met and £33.8mn paid. But the largest element — £156mn plus interest — is due in March 2024 and is conditional on Ocado Retail’s adjusted earnings before interest, tax, depreciation and amortisation in the year to November 23.
M&S said the outcome is binary; if the ebitda target, which has not been disclosed, is met, then the payment is made, otherwise no consideration is payable.
The performance of the joint venture has deteriorated in the current year as shopping habits normalised after the peak of the coronavirus pandemic, costs rose and customers’ budgets came under pressure.
In its last update in September, the online grocer said it expected sales to fall in the current year for the first time in its history. Ocado Retail has not yet published guidance for 2023 but analysts polled by Bloomberg expect the unit to report ebitda of around £43mn — better than the £13.8mn forecast for the current year but still only £8mn more than the £35mn recorded in 2019, the year the venture was created.
Mel Smith, the chief executive of Ocado Retail and a former M&S insider, left the business in August and has been replaced by Hannah Gibson.
M&S booked a small loss from its stake as part of its half-year results and chief executive Stuart Machin hinted at dissatisfaction with the performance of the unit, saying its proposition “of market leading quality, service and choice underpinned by M&S food became diluted”.
Both companies said the reduction in fair value was largely an accounting technicality and was necessarily imprecise as the financial year in question had yet to start. But M&S chief financial officer Eoin Tonge also told analysts it was likely the group would have to put more money into the venture, probably in 2024.
“We’ve always sort of assumed that we’re going to have to make some funding requirements into Ocado. But obviously that’s becoming more realistic, given that the return to profitability is taking a bit longer.”