Part 1: Will Deliveroo's IPO Deliver?

As a student with a weakness for takeaways, Deliveroo is a bit of a household name for me. But with its impressive expansion over the last 12 months in a pandemic that has created huge customer demand for its delivery service, it has likely become a household name for people of all ages.

Prior to March 2020, Deliveroo predominantly operated in city centres, with most people living in small towns and rural areas strictly limited to the local chippy when searching for a takeaway. After ensuing heavy losses in 2019, the company demonstrated its ability to profit in the first two quarters of 2020, as well as expanding into 187 more towns and increasing revenues by 62% to £771.8M. These improved financial results have allowed Deliveroo to plan further expansion into 100 more towns with 4 million more customers in 2021, signalling the emergence of an eagerly awaited new and growing tech company on the U.K. stock market. The significant consumer demand for such delivery companies in the last year, coinciding with the huge growth and narrowing losses of the company, gave cause for optimism with the IPO.

A Boost for the U.K.?

The City of London has a chance to redefine itself following its separation from the EU (you can read about this here), and it is increasingly clear that top city executives, as well as Chancellor Rishi Sunak, want to see a de-regulated finance hub allowing for a plethora of new, innovative technology companies to list here. Up to now, there has been a notable absence of technology behemoths in the U.K., with the largest (by market capitalisation) being IBM with an £82bn valuation. Other than this, the London Stock Exchange can only boast the likes of Ocado, Halma, IQE and older strugglers like ITV. The U.S., on the other hand, boasts the likes of Apple, whose $2.03tn market capitalisation is greater than the entire U.K. FTSE 100 index, as well as companies like Amazon, Facebook, Alphabet, Microsoft, Tesla and more. It is these stocks that drove U.S. markets to record levels in 2020 and continue to represent the gold standard of global technology innovation, alongside their enumerable Silicon Valley counterparts.

But there are encouraging signs for the City, and Deliveroo’s decision to list in London will be particularly relieving as trading continues to flood out into Amsterdam and New York. The Hut Group’s £5.4bn IPO last year was the LSE’s largest for over five years and represented London’s largest ever tech IPO, and its impressive performance since will be encouraging news for Deliveroo. And with the EG group looking to go public on the LSE this year as well, we could be seeing a revival of larger tech companies in the U.K.

How will the IPO look?

Deliveroo announced their IPO plans at the beginning of March, initially targeting a market capitalisation of between £7.6bn and £8.8bn, or a share price of between £3.90 and £4.60. As we all know, the IPO has now happened, and the performance will be

evaluated in part 2 of the Deliveroo series. This IPO has offered about 384 million shares to investors, with the company pledging to raise £1 billion directly for company investment, with the remainder going to existing investors selling their shares (e.g. Amazon and Deliveroo CEO Will Shu).

Interestingly, the company has also decided to list using a dual-class listing structure. This means that there will be two classes of shares, with founder and CEO Will Shu holding ‘Class B’ shares that carry 20 votes, whilst all remaining shares will carry only one vote. This means Shu will retain 57% of the voting rights, while also allowing him to block any takeover attempts for at least three years following the IPO.

Now, this structure has divided opinion amongst investors and government officials. As mentioned above, the government is looking to ensure the City remains an attractive place for companies to list, with Chancellor Rishi Sunak and former senior bankers drawing up plans to change listing regulations in a deviation from EU rules. A review by former EU Financial Services Commissioner Lord Johnathan Hill specifically recommended new rules that would allow companies to become premium listings on the LSE without the founders having to sacrifice control. Essentially, founders would be able to maintain the dual-class listing structure indefinitely. This has caused unease amongst institutional investors in the U.K., as many big pension funds and investment funds automatically invest in these premium stocks (FTSE 100), which could be exposed to unnecessary and avoidable risk if these rules change.

As a result of both this controversial listing structure and questions over its treatment of workers, Deliveroo’s IPO has come under heavy fire from some of the U.K.’s largest investors. Legal and General, the U.K’s largest fund manager overseeing £1.3tn in assets, avoided Deliveroo’s listing, with the dual-class listing structure and concerning worker treatment cited as the main reasons, according to the Financial Times. Aberdeen Standard Investments and Aviva Investors, as well as many smaller funds, have also said they will not take part in the IPO for the same reasons, creating a cloud of uncertainty over whether the company’s targeted valuation will actually be reached.

Deliveroo’s workers’ rights

This concern over Deliveroo’s treatment of workers is not merely speculation. Deliveroo’s 100,000 delivery drivers are self-employed and thus are not entitled to any workers’ rights (i.e minimum wage or contracted hours). This means that many workers find themselves working incredibly long hours whilst earning less than minimum wage. According to the Financial Times, up to a third of their riders earn less than the hourly minimum wage on an average day of work, despite Deliveroo’s assertions that the self-employed riders have greater independence.

It is difficult to project what may be in store for Deliveroo following their public listing. The pandemic has of course greatly stimulated demand for food delivery companies, but when life finally returns to normal and people are no longer stuck at home, will these

companies be able to retain their customers? With companies like DoorDash in the U.S., which is markedly similar to Deliveroo, achieving a valuation of over $60bn in its IPO in New York in December, it suggests that investors perhaps do believe these companies will be able to retain customers and thrive in the long-term, as DoorDash stocks have performed well since. It’s also worth noting that tech IPOs made up 40% of all capital raised on the LSE in 2020 according to the Financial Times, with stocks such as The Hut Group performing well since being listed, representing good news for Deliveroo.

But it’s also worth remembering that IPOs do not necessarily transform growing companies into profitable machines; Uber and Lyft’s recent IPOs flopped and they both remain below their target price. Deliveroo is a growing company that has yet to show it can make sustainable profit; despite the pandemic boosting customers and revenues significantly, it still achieved a loss of over £200 million last year as it invested in expanding its network in the U.K. and abroad. And with court cases surrounding its worker independent business model seemingly inevitable in the near future, its expenses could rise thereby placing further strain on its ability to profit. Many investors do not expect it to reach its £8bn valuation, and it is hard to justify such a lofty valuation, particularly in financial markets that have shown increasing volatility in 2021. Indeed, the IPO has been touted a failure in recent days, check out our part 2 on Deliveroo to understand why.