Whither Ocado as Fairfield fails to float

A planned £330m IPO by Fairfield Energy has been dropped, prompting rumours that Ocado's may follow.

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Last Updated: 06 Nov 2012

The oil exploration company’s listing on the LSE would have been one of the biggest so far this year, but was dropped at the last minute because of ‘difficult market conditions'.

Its failure has called into question the next big London IPO, that of chi-chi online supermarket Ocado. If jittery investors don’t even like the look of something as economically fundamental as an oil business – not for nothing is the stuff known as Black Gold – what hopes for a slickly branded but unprofitable and capital-hungry niche retailer?

Fairfield – which had it floated would have become one of the largest independent North Sea oil businesses – was planning to sell up to 50% of its equity for a minimum of £330m.

It was founded in 2005 and backed by a consortium led by Warburg Pincus. Total funding to date runs at some $600m, so those backers will now be urgently considering their options. Wait until sentiment improves (that could be a long while) or pursue other ways of getting its money back. But who to sell it to?

It’s the latest glitch in what has undeniably been a tricky season for IPOs – after the long fallow period at the height of the recession, the first ‘green shoots’ flotations were most welcome in the City, but recovery has not flowed easily.  Indian oil and gas biz Essar Energy, for example, only just got its £1.3bn offer away in April, and then suffered an immediate 7% fall in its share price.

So what of the rumours that this might affect Ocado and its planned £1bn IPO? Well, the firm said it is still very definitely on track to float, but the extent of the bad vibes emanating from many investment houses must be taking the founders – a trio of ex-Goldman Sachs bankers – by surprise nonetheless.

Richard Buxton, head of UK equities at Schroders, told the FT recently: ‘This is only for investors who wish to create capital gains tax losses.’ Ouch – that’s a niche market all right, but probably not the sort of niche that Ocado is looking for.  Another has described it even more damningly as ‘not an IPO, but a rescue rights issue’, citing a page in the prospectus which describes the business as a going concern ‘on receipt of £200m of net proceeds from the IPO'.

So what’s going to happen? Well, here at MT we don’t claim to be financial experts, but we do know that 99% of bellyaching in the City comes down to differences of opinion between buyers and sellers over price.  

It has to be said that the grumblers may have a point. There’s no doubt that Ocado has built a terrific brand with immense customer pull in its upmarket heartland within the M25. But £1bn is an awful lot of potatoes (even if they are hand-picked, new season Jersey Royals) for a loss-making business which isn’t even national, never mind international, and which competes with its sole supplier, Waitrose.

So a compromise is likely to emerge. The City consensus seems to be that a price tag of £500m-£600m would be acceptable, but such a huge dilution would be bad news not only for Ocados’ existing investors but also for the pockets and self-respect of the firm’s founders.

As Goldman alumni they ought to be some of the slickest salesmen around.  It’s hard to imagine them settling for what would amount to a BOGOF (buy one, get one free) deal on their shares.

Whatever happens, it’s going to make fascinating watching. We’ll be following it closely here at MT, so rather like online shopping, there’ll be no need to stir from your armchair to enjoy the spectacle.

In today's bulletin:

BA, Iberia and AA tie-up earns its wings
Whither Ocado as Fairfield fails to float
Workshy Brits throw 35m sickies a year
Apple drops the call
Not such a jolly holiday for cash-strapped Brits

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