M&S said back then that the deal would be largely financed by a £600million rights issue and that this year’s dividend would be cut.
On May 22, both events duly came to pass. Alongside yet another set of disappointing full-year results, chief executive Steve Rowe unveiled a 26 per cent cut in the dividend to 13.9p and a one-for-five rights issue at £1.85.
Tough times: In recent years, M&S has consistently struggled to find its way
That means shareholders are entitled to one new share at £1.85 for every five they hold – and they have until June 12 to decide what to do about it.
Rights issues are complicated because there are several routes that investors can pursue – each involves different mathematical calculations – and the sums change as the share price moves.
First, shareholders can subscribe for all their rights. If they own 500 shares, for example, they will be entitled to 100 new ones at a cost of £185.
Second, they can take up some of their rights, purchasing, for example, 50 new shares for every 500, at a price of £92.50.
This is cheaper than going the whole hog but it means that they will end up owning a smaller proportion of M&S stock after the rights issue than before it.
Third, they can sell their rights in the stock market. These are known as nil-paid rights and their value fluctuates in line with the M&S share price.
Deal: On February 27, Marks & Spencer announced it was joining forces with online retailer Ocado
When the rights issue was launched, M&S stock was trading at £2.71 so the new shares it was offering investors were 31 per cent cheaper than the pre-announcement price.
The discount was designed to entice shareholders to take up their rights and, if the price had remained at £2.71, shareholders would have been able to sell their nil-paid rights (under a complex formula) for 71.7p each, or £71.70 for every 500 shares they owned.
By last Friday, however, the shares had fallen to £2.25. Some decline was to be expected, given that the company is issuing 20 per cent more shares at a cut-price rate. But the extent of the fall suggests the market is in two minds about this rights issue. Equally worrying, the nil-paid rights were changing hands at just 39p by close of play last week.
If the share price continues to fall as the June 12 deadline approaches, the nil-paid rights are likely to fall too. If shareholders want nothing to do with this rights issue, therefore, they are probably best advised to sell the nil-paids now.
Investors can also sell enough nil-paid rights to finance the purchase of new shares without having to fork out any fresh cash, a process known as tail-swallowing.
At current levels, an investor with 500 shares would need to sell around 83 nil-paid rights to acquire 23 new shares at no extra cost.
Finally, shareholders can decide they have had enough of M&S entirely and sell all their shares. None of these decisions is straightforward. M&S was once synonymous with quality and reliability. Customers loved the stores. Shareholders loved the shares.
Bottom line: Even though Ocado sells a lot of products, it has never made a profit
In recent years however, the business has consistently struggled to find its way. The stock rose to more than £7 before the financial crisis but the price plummeted to below £2 in the ensuing recession and there has been little joy since, even though This Morning presenter Holly Willoughby was brought in earlier this year to back new ranges.
At the annual results last month chief executive Steve Rowe said the company was judging itself ‘as much by the pace of change as by the trading outcomes’. He has a plan – based around selling more of what customers want, closing down stores, cutting costs and moving into the digital age.
Having been at M&S since 1989 and held the top job for the past three years, Rowe should know what needs to be done.
Yet ‘the pace of change’ has been painfully slow so far. The shares are down more than 40 per cent since Rowe was promoted and shareholders have every right to feel impatient.
At his side is Archie Norman, a veteran retailer and turnaround specialist, appointed chairman in September 2017. Norman has form but there has been little sign of it to date at M&S, either in the financial results or the share price.
Now Norman and Rowe are hoping Ocado will make a difference, at least in M&S food, which accounts for more than half the group’s sales.
They point out that M&S shoppers account for a third of Britain’s online grocery spend and suggest that the tie-up with Ocado will provide the best of two worlds – Ocado’s top-notch online service and Marks’s top-quality food.
But that logic assumes that M&S shoppers will seamlessly switch to Ocado, even if they have been happily using other online options, such as Tesco or Sainsbury.
It also assumes that Ocado shoppers will remain loyal, even though Ocado has been associated with Waitrose for the past 19 years.
Anecdotal evidence suggests neither assumption is watertight. The deal has already caused consternation among Ocado groupies and Waitrose is bound to try its hardest to lure them to its online site.
It is also worth noting that, even though Ocado sells a lot of products, it has never made a profit.
M&S shareholders have had a rough time, as the company has tried time and again to regain its position as the star of British retailing. But success has proved elusive and, at £2.25, the stock is at a ten-year low.
M&S loyalists may decide to subscribe for all or some of their rights and hope for the best. Other shareholders may well be better off selling their nil-paid rights and thinking long and hard about whether they want to keep the shares they started off with. There are higher growth and better value retailers on the market.
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