Company in the news: Is Ocado a takeover target?

Ocado has recently attracted the attention of supermarket giant Morrisons. But is the online supermarket a realistic takeover target, and should you buy in? Phil Oakley investigates.

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The convenience of online shopping is great for customers, but can any companies make decent money out of it? The evidence so far suggests not.

Take Ocado, which has invested £263m in warehouses, vans and technology to create a specialist online supermarket. Last year it had sales of £716m and trading profits of £4.9m a return on investment of just 1.9%.

Last week's decision by Morrisons finally to bite the bullet and join the likes of Sainsbury's and Tesco in selling food online has put Ocado back in the spotlight. Is it a takeover target? Ocado may be worth more to a company like Morrisons or Marks & Spencer, which don't sell groceries over the internet, than as a standalone business.

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Ocado's technology is held in high regard by competitors, but the main sticking point for any bid will be price. At the current share price of 157p, it would cost someone nearly £1bn to buy Ocado outright.

Unless a buyer could make annual profits of at least £100m (a return of 10%), it's difficult to see the maths stacking up. So although it may be taken over one day, paying today's share price for Ocado looks like a risky punt for private investors and corporate raiders alike.

Verdict: avoid

Phil Oakley

Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.

 

After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.

 

In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.

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