Ocado IPO: Don't touch it with a bargepole
Ocado's flotation is like something out of the dotcom boom: an over-valued, loss making company in a desperate call for cash. But it's a great lesson in what to look out for in new issues, say Bengt Saelensminde.
There's something you really need to know about Ocado's share offer. You won't see it in the press, as they're looking in all the wrong places. I mentioned that I was wary about this share offer last week. Now that I've had a good look at the prospectus I'm sure.
I'm not going to talk about the concerns voiced in the media over things like fierce online competition and the fragile sourcing agreement with Waitrose. That's not the big issue. What's really of concern is that this looks more like a last ditch attempt for the founders to get something out of the business.
It's a great lesson in what to look out for in new issues.
They want your money
Ocado wants over £400m. That's £200m for 'expanding' the business and around £200m for founders that want to bail out. It's not unreasonable to take some cash off the table, but it's hardly a sign of confidence when some founders want to dump all of their shares!
They want you to pay a dotcom-frenzied price
To value a business, you need some earnings projections. But with Ocado, it's practically impossible to make any projections. This is how I see their offer:
"We've been trading for ten years. It hasn't worked. We can grow turnover, but we just can't make a profit... at least, not one that's going to make us really rich. Now we're in trouble. We desperately need more money so we can try another idea. We're brilliant bankers, so we deserve your money. Oh, and by the way, some of our original sponsors have lost faith and want their money back... so can you pay them off too?"
The FT reports one institutional investor likening it to a "technology IPO of the late 1990s". What he's really saying is that there's no credibility for the valuation. It's all based on hope. It's like the founders are caught in a time-warp and they're still back in 2000 when they first set up the business.
The deeper you delve, the worse it gets.
They need your cash quick!
Richard Buxton, head of UK equities at Schroders says, "The Company needs the money". It looks like a desperate cash-call. A statement tucked away in the prospectus tells us that without the £200m from the share issue, Ocado may not be a going concern i.e. it could go bust.
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The rotten secret at the heart of the offer...
Ocado was a terrible mistake. Believe me, no entrepreneur sets out a business plan that says it'll reach profitability in 12 to 15 years time (brokers estimate a profit somewhere between 2012 and 2015). Nobody would have leant them money on that basis.
So this is a business that went wrong. But don't expect the founders to admit that.
City bankers have big egos. These guys left well-paid jobs to start a dotcom at the height of the bubble. They want to show everyone that they're winners.
Everything else has failed, so now they want to sell the shares to us, the public. They're offering shares to us via our pension and insurance institutions and directly to Ocado employees and customers.
They're asking the latest round of mug punters to pay more than the original investors paid. This is bonkers. It's the wrong way round!
When you make a bad investment, you expect to lose money. But not these guys. They want to off-load stock onto mug punters and, on top of that, raise more cash in a last-ditch attempt to make the business work.
Will they get away with it?
I don't think that they'll get the institutional support they need for the fund-raising. They've already thrown £350m into this bottomless pit.
Now they're running out of track. There are question marks over the company's finances - and then there's the other issue over whether this outfit can take on the big boys in what is a low-margin business.
This is a lesson in why you should never trust any business plan just because it's been put together by brilliant financiers. The most important thing in any new issue is the management team. If you want an ex-banker as finance director, fine. But for heavens sake make sure the rest of the management team are from industry and understand what they're getting into.
And if I haven't been clear enough already, my advice is steer well clear of the Ocado IPO. Don't short it though! If they get the offer away, expect the price to be massaged upwards for a while after the listing.
This article was first published in the free investment email The Right Side on 12 July 2010
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