July 21, 2010 / 11:45 AM / in 8 years

Ocado shares trade 10 percent below IPO price

LONDON (Reuters) - Ocado shares slid 10 percent on their market debut, even after the British online grocer dropped the price of its initial public offering nearly a quarter at the last minute to lure skeptical investors.

Ocado shares were quoted at 162 pence at 7:00 a.m. EDT, above a low at 155 pence but below the 180 pence IPO price announced on Wednesday.

Only Tuesday, Ocado lowered the range for its flotation price to 180-200 pence from an initial 200-275 pence.

Chief executive Tim Steiner said the company was still undervalued, during a conference call with journalists.

“People are missing some things about Ocado because they are looking in the rear view mirror at our historical performance. Things change in the future,” he said.

Steiner blamed the falling share price on hedge funds.

“I am not overly surprised a couple of hedge funds wanted to have a pop at the open. We will see where it is trading in 24 months time,” he said.

Steiner said the IPO price was cut to ensure a higher quality book of investors likely to hold shares long term. A number of investors had purchased stakes of more than 3 percent of the company, Steiner said, though he declined to name them.

Around 40 percent of the order book will be allocated to British investors, while continental European and U.S. funds will take around 30 percent apiece, Steiner said.

“Even at the revised valuation, the company is still overvalued and expensive. We would not be surprised to see hedge funds shorting the stock,” said Amisha Chohan, an investment analyst at HB Markets.

Mike Nicol, manager of the Merrion European Absolute Return long-short hedge fund, said the deal was reminiscent of the 1990s dot.com boom, characterized by early-stage listings of companies that had never turned a profit.

“It does seem a very early stage investment. I am not sure it should have been listed at this stage,” he said.

Ocado, which sells the products of upmarket grocer Waitrose, is enjoying soaring sales as Britons flock to buy groceries on the internet.

But it has yet to make a pretax profit and analysts have questioned whether its model of filling orders from a central depot can be as profitable as filling them from stores, as done by rivals Asda, Sainsbury, and Tesco.

Ocado, founded in 2000 by three former Goldman Sachs bankers, raised 200 million pounds ($306 million) in the IPO to pay down debt, expand its existing warehouse and start building a second facility.

At the issue price, the group had a market value of 937 million pounds, way above some analyst estimates of no more than 500 million.

VALUATION

“It is astonishing how high a price is being paid for Ocado,” Arden Partners analyst Nick Bubb said.

Ocado’s enterprise value -- equity plus debt -- was equivalent to 41 times Bubb’s forecast for earnings before interest, tax, depreciation and amortization (EBITDA) for the year to November, falling to 28 times the following year.

That compared with fast-growing online fashion retailer ASOS

trading at 23 times Bubb’s forecasts for the year ending March 2011.

Ocado’s existing investors, mainly the pension fund of Waitrose parent John Lewis and banking group UBS, raised about 154 million pounds from selling shares.

“The fact that our IPO completed successfully in very difficult markets is an endorsement of the long-term growth potential offered by Ocado,” Steiner said.

Investors have driven a hard bargain with new issues this year amid turbulent financial markets. Last week, oil and gas firm Fairfield Energy pulled its planned flotation, while others, like Ocado, have had to reduce their price expectations.

Ocado founders Tim Steiner, Jason Gissing and Jonathan Faiman have retained big stakes. Gissing and Faiman both sold about 2 million shares. In total, directors will own about 20 percent of the company.

Ocado was advised by Goldman Sachs, UBS and JP Morgan Cazenove, as well as a junior syndicate of five banks, which will all share about 15 million pounds fees.

(Additional reporting by Laurence Fletcher; Editing by Dan Lalor)

$1 = 0.6534 pound

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