Louise Mulliez, Analyst at King’s Global Markets
Founded just eight years ago, Deliveroo now operates with over 140,000 restaurants in 12 countries and around 110,000 riders, including 50,000 in its core market, the UK. Like most companies, Deliveroo suffered greatly from the pandemic when restaurants were forced to close during lockdown periods. It has even been reported that Deliveroo was hit so hard that Amazon’s latest round of funding in May 2019 saved the company from collapsing. Ultimately, this dire situation was reversed and Deliveroo became a major beneficiary of the lockdowns in response to Covid-19 in the UK, seeing a 50% increase in their revenues from 2019 to 2020. As a result, in March 2021, Deliveroo opted to launch an IPO in London, a highly beneficial move for the UK, representing the ability of London’s capital markets to support global technology companies.
Deliveroo was advised by some of the leading banks, namely Goldman Sachs and J. P. Morgan, as well as top law firms. As a result, the company expected to be valued at £8.8 billion, based on a share price of between 390 and 460p. However, after being publicly criticised by some of the UK’s leading fund managers on the grounds of pricing and ESG risks, the final price was set at the lower end of this range, with a valuation of £7.6 billion, more than £1 billion lower than the indicative valuation. This is the first time high-profile Western fund managers publicly shunned a major IPO, shaking confidence in Deliveroo’s prospects.
On the first day of trading, traction was unusually weak for one of the largest IPO in London since Glencore in 2011. Indeed, when the market opened, the shares quickly lost nearly a third of their value with a sharp 30% fall in the first few minutes, wiping £2bn off its IPO value. By the end of the day, the share price was down 26% (287.45p per share), reducing the company’s value on paper to £5.2 billion. As a result, Deliveroo’s IPO has been described as the worst in the history of the London market, while simultaneously blowing away the UK’s ambitions.
According to Neil Wilson, Chief Market Analyst for Markets.com, even though the price of the IPO was at the lower end of the range, Deliveroo was still asking too much, i.e. 6.4 times 2019 revenues and 4.8 times Justeat’s valuation. Meanwhile, Sophie Lund-Yates, Equity Analyst at Hargreaves Lansdown, also pointed out that the company has built up a deficit of more than £300m in 2019 and a loss of £224m in 2020. In reality, the complexity of Deliveroo’s IPO pricing is also caused by the fact that since 2013, it has been a loss-making delivery platform with a questionable path to profitability.
Besides the pricing issue, the regulatory environment has also been undermined by the uncertain workers’ rights in these “gig economy” businesses. Notably, Eden Tree Investment Management pointed out that the business model deployed by Deliveroo is “best characterised as a race to the bottom, with employees treated primarily as disposable assets”. Indeed, a survey of the earnings of 300 delivery workers over the past year found that one in three earned on average less than £8.72 per hour, the minimum wage for the over-25s. As a result, many investors are concerned that Deliveroo’s employment practices in the gig economy are not sustainable. Moreover, governments and authorities are taking a closer look at the employment conditions of workers in companies such as Uber, which lost a lengthy legal battle in February. This raises the question of whether Deliveroo must improve wages and conditions for its riders, fearing that the path to profitability will be even more difficult, as the company’s margins are already thin.
Alongside the question of riders’ rights, there is also the matter of shareholders’ rights. Indeed, the reason Deliveroo chose London over New York is that the chairman of the London Stock Exchange provided the option to use a dual-class structure in the premium segment of the market, a common practice in the United States that grants different rights to shareholders within the same entity. In other words, each of the founder Shu’s shares will be worth 20 votes, while all others investors’ shares will have only one vote, allowing him to retain control of the company for three years. The concern is that institutional investors often try to influence a company from the inside, however, the dual-class share structure would make this difficult, exposing investors to the risk of management misbehaviour, resulting in avoidable losses for investors.
In conclusion, Deliveroo’s future remains uncertain given its post-pandemic outlook and resilience to competitive threats but also given the social and governance risks that revolve around the company.
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