And its shares fall further as trading begins...
Online grocer Ocado Group (LSE: OCDO) has been forced to slash its offer price in order to get its flotation off the ground, after investors turned their noses up at the company's original ambitious valuation.
Earlier indications suggested a flotation price of between 200p and 275p per share, valuing the company at between £800m and £1.1bn, but after weeks of ignoring negative reactions from analysts and lukewarm demand from potential buyers, reality had to be faced.
The new offer of 180p per share values the firm at £720m, which is still some way ahead of estimates from bearish analysts, some of whom have placed a value as low as £500m on the loss-making outfit.
Shares down
Even at the new lower price, Ocado has had to provide an additional safety net for customers who had the opportunity to get in at the start. With the price announcement not coming until Tuesday and customers having had to commit themselves by last Sunday, they now need to be sent an updated prospectus, and will able to drop their commitment if the price drops below the offer price.
And that has already happened. At the time of writing, the shares were down to 163p -- a drop of around 10%. Still, the flotation is fully underwritten now, so even if all customers drop out, it's a done deal, and fears that it could be pulled at the last moment have not come to pass.
The original owners of the company have sold fewer shares than had been expected, with the John Lewis pension fund cutting its stake from 26.5% to 10.4%, and CEO Tim Steiner deciding not to sell any shares at all at the revised offer price.
Risky future
New investors are now facing a risky future. In its 10 years of operation, Ocado has yet to make a penny profit, and break-even isn't expected for another couple of years. If that is to be achieved, it will need the company's warehouses (the existing one, and the new one to be built with some of the flotation funds) to be operating at their peak.
Ocado is currently dependent on making home deliveries for Waitrose, with whom it is now effectively competing -- although a new contract taking it up to 2020 was signed earlier in the year.
There is also some pretty stiff competition in the form of established home delivery services from Tesco (LSE: TSCO), and with Amazon's new groceries service having just started, it's by no means certain that Ocado is going to make it through to profit without further funds.
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