From best to worst in a day, you could barely ask for a better illustration of why Ocado (OCDO) is the most volatile FTSE 100 stock, according to MarketScreener data.

Yesterday (22 Jun) the grocery delivery and warehouse automation company led the UK’s blue-chip index after jumping 32% as takeover rumours swirled around the City.

The Times reported speculation of bid interest from more than one US suitor, among them e-commerce colossus Amazon (AMZN:NASDAQ), which is rumoured to be considering an 800p-a-share bid.

Yet just 24-hours later and investors seem to be having second thoughts, and Ocado today is the FTSE 100 biggest loser, falling about 8% at 527p, albeit, still significantly above the 430p closing price on 21 June.

SOBERING SCEPTICISM IN THE CITY

Analysts introducing a little sobering scepticism, or wisdom if you prefer, seem to have brought much-needed perspective to events.  

‘To be clear, we do not know if there is something going on in terms of a present bid for Ocado,’ said Shore Cap’s Clive Black.

That said, he pointed out that given the notable share price movement, ‘we would be amazed if the UK Takeover Panel had not been in touch with both Amazon and Ocado to seek clarification as to the veracity of this story line.’

That there was no announcement from either party on the 22 June or on the morning of the 23 June, suggests to us that there was nothing to report and as such, other factors must be at play, not least the ‘short squeeze’ Shares explained yesterday.

‘In our initiation, we concluded that the Tech Solutions business can provide the picks and shovels for online grocery, which is expected to reach 25% penetration of the grocery market,’ said Davy analysts.

Davy also urged investors to remember the massive £550 million annual capital expenditure requirement and the £600 million convertible loan that expires in December 2025, forecasting that Ocado will run out of cash in 2025.

‘Ocado needs more cash to build out Tech Solutions at a modest growth rate, on top of the £1.4 billion debt and £1.5 billion equity raised since IPO (initial public offering) in 2010.

‘The capex requirement is what makes a grocer purchaser feel unlikely, these are low margin businesses that shy away from expensive risks – see how slow they have been to buy from Ocado, it feels unlikely that they would jump in the deep end and buy the whole company,’ added Davy.

DEAL OR NO DEAL

Shore Cap’s Black accepts that ‘beauty is in the eye of the beholder’ and he cannot discount that there could be a bid for Ocado, but ‘it would be crazy to do so,’ he believes.

Even if Amazon were to launch a buyout – something it has failed to do for more than a decade despite plenty of opportunity – the UK’s monopolies watchdog, the Competition and Markets Authority, would almost certainly want to take a good hard look at the details.   

Black says that the value of the company’s equity has been severely challenged by the amalgam of a material contraction of its addressable market, major reported losses (more than £500 million in 2022), terrible capital returns on considerable capital expenditure, little evidence that external investments have generated shareholder value (one, Karakuri, went into administration last week), and limited additional good news about Ocado being the technology of choice for supermarkets around the world.

‘Noting as we do the somewhat pedestrian progress currently in its key relationship with Kroger (KR:NYSE) in the US.

‘We contend that without a material improvement in financial performance of Ocado, which holds out to much better times in three to four years, its stock can reasonably be expected to drift back to recent levels, in our view,’ concludes Shore Cap’s Black.

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