Reuters: Hot Stocks: UPDATE 2-Morrison seals $306 mln Ocado deal for online groceries

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UPDATE 2-Morrison seals $306 mln Ocado deal for online groceries May 17th 2013, 09:57 Fri May 17, 2013 5:57am EDT * Morrison to invest initial 216 mln stg in 25-year deal * Ocado says deal will not impact Waitrose arrangement * Waitrose talking to lawyers * Ocado shares at record high, up as much as 47 pct (Recasts, adds share rise, comment) By James Davey LONDON, May 17 (Reuters) - British supermarket chain Morrison is investing more than 200 million pounds ($306 million) in a 25-year deal with online grocer Ocado, seeking to catch rivals in home delivery and sending Ocado shares sharply higher. Morrison, which trails Tesco, Wal-Mart's Asda and J Sainsbury in annual sales, has been losing market share, partly due to its lack of exposure to the fast-growing British online market for groceries. Yet upmarket grocer Waitrose (part of retailer John Lewis ), which provides many of Ocado's products, said it had instructed lawyers to get advice on the Ocado deal. Morrison and Ocado said the deal would not affect Ocado's existing deal with Waitrose, due to run to 2020. Morrison, which already sells non-food items online, had held back from selling food because of doubts over the profitability of delivering groceries to customers' homes. Ocado has yet to make a pretax profit in a decade of business. "We think that the deal is easily a better one for Ocado than it is for Morrison," said analyst Philip Dorgan at brokerage Panmure Gordon. "Signing a 25-year deal in an online world with an unprofitable, unproven operator looks likely to cause problems." Ocado shares, which have had a rollercoaster ride since the company listed at 180 pence in 2010, jumped as much as 47 percent to a record 296.8 pence, valuing the company at 1.72 billion pounds. The deal will deliver an annual profit boost in the "mid-teens millions of pounds", Ocado said, and is a vindication of its business model which could open up overseas sales of its technology. Morrison shares rose 1.5 percent. Waitrose said it had instructed lawyers earlier this week to get advice on the deal and had on Friday asked Morrison and Ocado to see the detail of the contract to ensure there was no breach of its existing agreement. "Once we've done that, we'll decide what appropriate action to take," a spokesman for Waitrose said. VERY DIFFERENT Morrison CEO Dalton Philips said the Ocado deal would help achieve the company's home shopping aims. "This is a Morrisons website, it's Morrisons food, in a Morrisons van, with a Morrisons driver, it's Morrisons the whole way through," the chief executive said. "It's a very different arrangement from the sourcing arrangement Ocado has where they source Waitrose food," he told reporters. Morrison's online offer will be met from Ocado's recently opened Dordon distribution centre in central England. It will make an initial payment of 170 million pounds to Ocado to acquire Dordon and associated equipment, as well as a licence and integration fee. Morrison said a further 46 million pounds will be invested to expand Dordon in order to accommodate its range, integrate with its systems and establish a delivery network. On an annual basis Morrison would pay Ocado service costs and a contribution to R&D expenditure, as well as a share of Morrisons.com's earnings. It said there would be a further 25 million pounds of development costs in the year and forecast that the online business would be earnings positive by the 2017 financial year. Britain's online food market is growing at around 16 percent a year and is set to almost double in value over the next five years to 11 billion pounds, Morrison said. Tesco and Sainsbury say their online customers tend to be their most loyal, also spending heavily in stores. ($1 = 0.6533 British pounds) (Editing by Rosalba O'Brien and David Holmes) Link this Share this Digg this Email Reprints

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