Tuesday 14 August 2012

An Amazonian window?

Yesterday’s news that Ocado is in risk of breaching its bank covenants, coupled with its fall in share price, could represent a takeover opportunity for Amazon

Loan covenant definition:
A condition with which the borrower must comply in order to adhere to the terms in the loan agreement. If the borrower does not act in accordance with the covenants, the loan can be considered in default and the lender has the right to demand payment (usually in full).

Minimum financial ratios
The borrower is required to maintain a certain level in key financial ratios such as:
- Minimum quick and current ratios (solvency & liquidity)
- Minimum Return on Assets and Return on Equity (profitability)
- Minimum equity, minimum working capital and maximum debt to worth (leverage)

Market impatience
Given that Ocado is forecast  to make a loss of 1.5% in 2012 and 2013, it is unlikely that in the current climate, the markets will be prepared to tolerate any further delay in achieving acceptable levels of profitability.
Moreover, a leading retail analyst has warned that online grocer Ocado is in significant danger of breaching its banking covenants this year, owing to a toxic cocktail of a "pile of debt and falling market share".

Ocado’s dilemma
Essentially, Ocado has reached a point that often causes problems for an undercapitalised business needing to fund the development of critical mass.
They have broken the back of grocery home delivery in an M25 enclosure that has the potential population to provide a profitable opportunity for the right company.

The Amazon opportunity
Amazon meanwhile needs a way of adding groceries to its repertoire and showing it can match traditional providers in terms of service level, profitably…

We believe that taking over Ocado would provide such an opportunity.

As you know, Amazon entered the UK grocery market last year with a piece-meal ‘multiple-delivery’ model that failed to impress anybody other than those people who saw it as merely an opening gambit.
Moreover, in July last year it was mooted  that the acquisition of Ocado might represent a good opportunity for Amazon, at a time when Ocado’s market capitalisation was £1bn.

With Ocado’s market capitalisation now having fallen to £365m, we believe that the likelihood of a bid is a running certainty…

NB If you want to catch up with Amazon see our free paper Amazing Amazon

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