M&S shares slump on Ocado deal but CEO Rowe has made the right move for the long term despite the fancy price

M&S investors reacted to the official announcement of its £750m joint venture with Ocado as if someone had yelled ‘fire’ in a crowded cinema, positively falling over each other in the race for the exit.

The shares' slump shouldn’t come as too much of a surprise given the steepness of the price and the £600m the company wants its investors to stump up through a rights issue to pay for it, combined with a savage 40 per cent cut to the dividend.

But the many critics of the deal from the M&S perspective are missing the wider picture. This could turn out to be the first good move the business has made in years, decades even. It could yet prove to be what stops the one time high street staple from joining the growing list of names that have been falling through the trapdoor into either retail hell or Mike Ashley purgatory.

Prior to this, M&S was in a strategic cul-de-sac, closing stores, sacking loyal workers, and looking at a future of managed decline at best.

Even CEO Steve Rowe’s decision to focus on M&S Food was starting to unravel, with the former star in the retailer’s galaxy shining a lot less brightly than it once did.

The Ocado deal could, if it comes off, breathe new life into that business, and the group as a whole through filling a glaring hole in the M&S armoury: the lack of a food delivery business. It also makes its general merchandise available via the successful Ocado platform.

It thus puts M&S much more firmly where the action is in retail and holds out the prospect of something that this business has not seen for a very long time: growth.

Rowe still has a lot of work to do to pull it off. For a start, he needs to ensure his sales pitch is spot on. The arrogance this business has displayed in the past will not serve him well if he indulges in it.

Hargreaves Lansdown’s Laith Khalaf, who sees the potential in the tie up, has put his finger on one of the big problems the M&S boss faces at the same time. His shareholder base is largely a mix of income investors, who rely on a chunky dividend yield, and value seekers, who feel that the retailer's current low rating under sells the business.

Neither group bought into this company seeking a growth stock, which is what Rowe is clearly seeking to turn it into, and there are a lot of small shareholders whom this could hurt quite badly. You have to feel for them.

But really, the alternative was death by a thousand cuts. Faced with that, Rowe has sensibly rolled the dice. He has a lot to prove, but you can’t fault him for doing that given the situation he's in.

As for Ocado, it’s sitting pretty, with a big cash bung to invest in its international business, and a high quality replacement for Waitrose now that its 19 year relationship with the John Lewis Partnership's grocery arm is drawing to a close.

Tim Steiner was already able to look back at the critical comment his outfit used to generate with a smile given the numbers Ocado has put up, and the tech sales it has made. Now he’s laughing. All the way to the bank.