(Bloomberg) -- Marks & Spencer Group Plc investors gave a thumbs-down to the retailer’s plan for financing a grocery-delivery joint venture with Ocado Group Plc in a way that threatens the value of their current holdings.

M&S said it will offer as much as 600 million pounds ($797 million) in new stock to help pay 750 million pounds for a 50 percent stake in the partnership, diluting existing investments. The U.K. retailer will unseat John Lewis Partnership Plc’s Waitrose as the tech startup’s main grocery supply source as of September 2020.

M&S fell as much as 10 percent, the most since June 2016, while Ocado rose as much as 6 percent. The retailer also said it plans to cut its dividend by 40 percent, while the agreement raised questions about its strategy. Until now, M&S has focused on selling small baskets of premium-price grocery items, while large orders are more viable in low-margin e-commerce.

“M&S still haven’t proved that they can generate a high enough shopping basket to make online grocery pay, so this seems a huge leap in the dark for them,” independent retail analyst Nick Bubb wrote in a note to clients.

Licensing Business

The deal combines M&S’s branded food and beverage range, currently sold in the company’s “food halls” and convenience stores across Britain, with Ocado’s own-label and third-party branded products. The agreement means Ocado can focus on its business that licenses automated warehouse technology to supermarkets, which has grown faster than the U.K. grocery operation.

“This is a transformative deal in the U.K. grocery market which brings together two iconic and much loved British retail businesses,” Ocado Chief Executive Officer Tim Steiner said by phone.

U.K. stores have been struggling to compete with the rise of online shopping, as the Brexit-induced weakness of the pound squeezes profit margins, contributing to the growth of empty shopfronts throughout the country’s town and city centers. Discounters Lidl and Aldi are adding to the pressure, prompting market leader Tesco Plc to create its own cut-price store brand and J Sainsbury Plc to seek a purchase of Walmart Inc.’s Asda that now faces growing regulatory opposition.

The M&S venture with Ocado would have had sales of 1.5 billion pounds and earnings before interest, taxes, depreciation and amortization of 34.2 million pounds for the 52 weeks through Dec. 2, the companies said. The new entity will no longer pay fees to Waitrose, which totaled more than 15 million pounds in 2018, they said. Growth will be stronger than it would have been with the previous Waitrose contract, Ocado said.

M&S chose to raise equity for the deal as its net debt stands at 1.8 billion pounds. Bondholders were cheered by the decision. The company’s 400 million pounds of bonds due June 2025 rose almost one penny on the pound to a three-month high of 106 pence, according to data compiled by Bloomberg.

On Tuesday each company’s shares had gained after they confirmed they were in talks.

Backout Clause

Ocado’s delivery service has transported Waitrose goods around the country for the last decade, and the delivery company used a breakup clause in its contract to walk away before the expiry date in a year and a half. The agreement with M&S is the latest for Ocado, which has struck technology licensing deals with U.S. grocer Kroger Co., France’s Casino Guichard-Perrachon SA and others.

M&S has been slower to move into home delivery than other British grocers. Its food business has waned as of late, following a slump in the apparel arm, pushing management into a cost-cutting initiative that’s scheduled to eliminate 100 stores in the next three years. The Ocado partnership could enable it to reach a wider customer base and offer more product lines in stores as well as online.

“It’s a game-changing step forward in shaping the future of M&S and becoming a digital-first retailer, with at least a third of the business online,” CEO Steve Rowe said on a call.

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