Why did Ocado shares surge 30%?

Ocado (LSE: OCDO) shares surged yesterday, prompted by widespread speculation that the company could be acquired by Amazon, as reported by The Times.

Although both Ocado and Amazon declined to comment on the report, investors responded by causing the struggling retailer’s shares to increase by over 40%, eventually settling more than 30% higher.

Throughout the pandemic, Ocado emerged as a market darling and the UK’s most valuable retailer, despite only commanding a small fraction of overall purchases. However, as in-store shopping resumed and prices began to rise, the company’s reputation suffered a sharp decline. In fact, its share price has plummeted approximately 80% from its peak in 2020. Analysts believe that this significant drop makes Ocado an attractive acquisition target for potential buyers.

In adherence to UK takeover regulations, companies seriously considering such moves are typically required to disclose their interest to investors. Amazon has long been focused on expanding its grocery business, acquiring Whole Foods and experimenting with cashier-less stores.

During his annual letter to investors in April, Amazon’s CEO, Andy Jassy, highlighted the immense growth potential in the grocery sector but admitted that the company was still searching for the right business model. Jassy highlighted the need for a “mass physical offering” in order to establish Amazon as a major player in the industry.

Ocado’s retail arm, in collaboration with Marks & Spencer, boasts nearly one million active customers as of the end of February, representing approximately 12% of the UK’s online grocery market. Additionally, the company has successfully sold its technology to grocers worldwide, including Krogers in the US, Casino in France, and Aeon in Japan.

However, Ocado reported a substantial pre-tax loss of £500 million in 2022. The company attributed this downturn to the “cost-of-living crisis” exacerbating the impact of customers returning to more typical behaviours compared to the restrictions observed during lockdown.

At the open in London this morning Ocado shares are down 5%.