Ocado up as much as 30% on placing and debt restructuring announcement

The online grocery delivery company, Ocado Group, surprised investors this morning with a longer term resolution to its ongoing debt and covenant breach worries.

The company floated at 180p in July 2010 and after after an initial flurry of excitement around the stock caused by takeover rumours and at which point the pension fund of the John Lewis partnership dumped their stake (inspired in hindsight) it has been downhill all the way…

Ocado has struggled particularly after losing its exclusivity to distribute Waitrose goods to online customers after Waitrose decided to launch their own Waitrose.com service. In addition, slowing sales growth and high capital expenditure on a second warehouse in Dordon have put the group under significant financial pressure. Talk of a risk of a breach of banking covenants has hung over Ocado in recent weeks as well as the departure of Simon Belsham, the head of its non-food business back to Tesco after just 18 months at the company adding to the tale of woe.

The  shares are currently up 22% to 74p but were earlier trading around 80p on news that it was raising £36 million through a placing of 56 million shares at 64p, a 4% premium to Friday’s closing price. In addition, its lending banks including Barclays, HSBC and Lloyds, have al agreed to extend the maturity of Ocado’s existing £100m capital expenditure facility for a further 18 months until July 2015, comprising capital expenditure of £90m and working credit of £10m. The fact that the placement was at a premium to Friday’s closing price, gives reassurance that major investors remain committed to the company despite its problems.

Gross sales in the 14 weeks to November 2012 were up 11 per cent year on year, while weekly orders hit 140,000 a week for the first time. Trading increased over the last six weeks, with the company reporting year-on-year growth of 13.7%.

The additional cash will be used by Ocado to strengthen its working capital position and continue its push into non-food goods. The company is hoping that the second warehouse in Dordon will be fully operational in February 2013 and serving customers.

Although it’s good news for Ocado, the pressure is still on for the company to deliver aggressive growth targets and get its new warehousing fully operational on time. Investors are still hopeful that eventually a predator will come along to take out Ocado’s distribution capabilities in the fast growing online retail space but there’s still a long way to go to get back to the 180p float price.

Contrarian Investor UK