After a wild opening with close to 50% share price gains, Ocado (OCDO) has settled down to see its stock 29% higher to 260.10p after finally announcing details of its hotly-anticipated tie-up with Morrisons (MRW). First flagged up to the market in March, the deal will help the UK's fourth biggest food retailer launch online grocery deliveries by January 2014.
The £1.24 billion cap said it has signed a 25-year deal with the Bradford-based retailer, up 4.1p at 286.7p, to license technology, logistics and distribution services to enable Morrisons' customers to order groceries over the internet by January 2014.
Bradford-based Morrisons will buy Ocado's Dordon distribution centre in the Midlands. Under the terms of the tie-up, delivery vans will carry the Morrisons brand, with logistical support provided by Ocado.
The delivery group reckons fees earned under the agreement will provide extra money to invest in technology, research and development. It flags more efficient utilisation of warehouse capacity and also highlights the strengthening of the balance sheet, with the company set to receive an upfront payment of £170 million.
Crucially, it insists: 'Ocado's customers and the current contractual agreement with Waitrose will remain unaffected by these arrangements, and over time the financial flexibility and increased investment should result in continual improvement of Ocado's proposition to its customers.' Chief executive officer Tim Steiner sees 'Morrisons' decision to adopt our model to drive its online launch as a further endorsement of our technological and logistical excellence.'
Today's share price rise follows a sharp fall earlier this week as investors fretted that talks with Morrisons may have damaged Ocado's critical relationship with John Lewis-owned Waitrose, upon which Ocado depends heavily for the bulk of its products. A supply agreement between Ocado and Waitrose runs until 2020, although Waitrose, which helped Ocado launch in 2001 and sold its 40% stake in 2011, can enact a break clause as early as 2017. Click here to read our recent story on this matter.
Panmure Gordon's Philip Dorgan, a persistent Ocado bear with a 'sell' rating on the stock, writes: 'Ocado has struck what looks to be an excellent deal with Morrison. However, we think that it increases the risk that Waitrose will walk away from its supply arrangement in 2017. Therefore, we would be cautious as to the long term implications of this deal, despite the immediate positive impact upon the P&L (profit and loss).'