Why the wheels came off Deliveroo’s overheated stock market flotation

Controversial share structures, employment conditions and ambitious valuations made the delivery company’s listing a flop. But all may not be lost…

Some City wags dubbed it Flopperoo, while others plumped for Deliver-oops. Markets platform Dealogic crunched the numbers and came to the conclusion that the 26% slump Deliveroo suffered on its first day as a public company meant London had just witnessed the least successful stock market float in its history.

In an internal memo, chief financial officer Adam Miller moved to calm any jitters among staff. “We have a simple message today: Don’t underestimate Deliveroo,” he wrote, before listing a string of mitigating factors for the dismal debut.

Volatile markets, he said, had not helped. He referred to other European and US IPOs in the past week that had lost ground. A hedge fund had also gone haywire last week, he added, causing some companies to trade down 30% in a single day. And Deliveroo’s “peers in the food delivery sector are down 10-35% in just the last six weeks”.

Deliveroo, he added, was a young company, “in great shape” and now also had “well-respected public market investors.”

Just in case they still hadn’t got the message, he added: “The company is not defined by our share price (good or bad) – it is defined by all of you.”

But Miller’s calming words can’t refute the fact that the firm’s arrival on the London Stock Exchange did not go according to plan, and has left 70,000 small investors, who put up £50m, nursing losses.

Deliveroo had hoped for an £8.8bn valuation, but after some City investors voiced concerns about the business, it ended up pricing its shares at the very lowest end of the range it had suggested, valuing the firm at £7.6bn. However, when trading started, the share price immediately declined, albeit only in “conditional” trading.

“Several reasons are behind the poor performance,” said analyst Neil Wilson of Markets.com. “In addition to the failure to bring several large funds on board, the dual-class share structure, regulatory uncertainty, general profitability concerns and a miscalculation by the bankers on the pricing in relation to wider demand in the market, it also looks like some hedge funds shorted the stock aggressively from day one.”

That’s quite a roll-call of problems, but the dual-class share structure is a good place to start.

Chancellor Rishi Sunak had rolled out the red carpet for Deliveroo by unveiling plans to tweak City listing rules and make firms with a dual-class structure eligible for premium FTSE listings.

Deliveroo founder Will Shu
Shares held by Deliveroo founder Will Shu carry more votes. Photograph: Nora Tam/Getty Images

This affords them access to a bigger funding pool while allowing founders – such as Deliveroo’s Will Shu – to retain control via shares with enhanced voting rights. So some shares – Shu’s – carry more votes than others, giving him more power than other investors with the same amount of stock. The arrangement is not uncommon for US tech firms led by founders with big stakes.

The idea of allowing this in the UK is to encourage tech champions to choose to list in London, rather than New York or Los Angeles.

Founded in Chelsea, Deliveroo – a “true British success story”, to use Sunak’s words – was to be at the vanguard of companies with flotation plans that would put London on the big tech map and generate serious income for bankers and advisers.

Yet the welcome mat laid out for such share structures appears to have been among the factors that most alienated investors.

“What is wrong with one share, one vote?” said Sacha Sadan, director of investment stewardship at Legal & General Investment Management (LGIM). “If a client puts £1 in, why should they not get a £1 economic interest? Seems fair.

“It is important to protect minority and end-investors against potential poor management behaviour that could lead to value destruction and avoidable investor loss.”

Just as off-putting for some was the faint whiff of exploitation accompanying every meal, with some of Deliveroo’s 100,000 freelance couriers claiming they receive less than the minimum wage.

David Cumming, chief investment officer at Aviva Investors, said workers’ rights were a key reason he had not invested in the business: “A lot of employers could make a massive difference to workers’ lives if they guaranteed working hours or a living wage, and how companies behave is becoming more important.”

LGIM also pointed to “contentious” issues around worker rights, citing a desire to invest clients’ money responsibly. That ethical concern could also develop into a financial one.

February’s supreme court ruling, that drivers for taxi app Uber were workers rather than self-employed, could have significant ramifications for all gig economy firms. Deliveroo has admitted that the possibility of a reclassification of its riders into workers poses an investment risk to the business.

High-profile suits from riders seem like an inevitability – indeed Deliveroo has put £112m aside to fund its defence. Losing those cases could have seismic consequences for its cost base.

“We didn’t invest in it because we were worried about the combination of the valuation and the potential risk to the profitability of the business if they did have to employ all their riders,” said Rupert Krefting, head of corporate finance and stewardship at fund manager M&G.

Deliveroo riders protesting over pay outside the company HQ in London.
Deliveroo riders protesting over pay outside the company HQ in London. Photograph: Jonathan Brady/PA

Timing was a factor too. Deliveroo sold itself as a fast-growing tech company, heavily loss-making (£875m and counting in the past four years) but worth the investment because of its prospects as – in its own words –the “future of food”.

But with coronavirus vaccines offering a glimmer of hope for restaurant-goers, Deliveroo floated at the first moment for about a year when takeaway meals look like a smaller part of the future than they are now.

“That’s an additional risk, and nobody really knows what consumer behaviour is going to be like when we come out,” said Krefting.“I do suspect that once pubs and restaurants open again, everyone will rush to go out.”

There’s an irony in the end of the pandemic posing a risk. Last spring, Deliveroo warned that it could be destroyed by coronavirus, an alarm that saw the Competition and Markets Authority wave through a £450m investment led by Amazon that the watchdog had previously had doubts about. Months later, it has brushed off the supposed existential threat and got its float away, yet struggled to match expectations precisely because things are now looking up on the pandemic front.

The consensus among fund managers and bankers seems to be that Deliveroo was just a little over-ambitious on valuation, given such headwinds. A number of hedge funds also appear to have spotted that valuation mismatch and bet against the stock, potentially exacerbating its fall.

Many of Deliveroo’s small investors may now be anxious. But it is not all bad news.

Analysts at Bloomberg Intelligence point out that the float left Deliveroo with a cool £1bn (the remaining £500m was collected by shareholders cashing out) to invest in growth, service improvement and marketing to help it compete with rivals such as Just Eat and Uber Eats.

Deliveroo can push further into grocery delivery, something the UK has become much more used to during the pandemic, as well as building its network of “dark kitchens” – purpose-built cookhouses that help expand its geographical reach. It already delivers groceries from supermarkets such as Waitrose, the Co-op and Morrisons.

It’s also worth remembering that firms including Uber and Facebook suffered humiliating floats but became stock market darlings. In the run-up to the stock market debut of Ocado, which has plenty in common with Deliveroo, one City analyst quipped that it “begins with an o, ends with an o, and is worth zero”.

Needless to say, the £15bn delivery giant had the last laugh. “Don’t underestimate Deliveroo,” said Miller. He may yet laugh longest.


Rob Davies and Kalyeena Makortoff

The GuardianTramp

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