Analysis: Deliveroo's IPO
Updated: Mar 18, 2021
Fast-food delivery firm, Deliveroo, has recently announced its plans to list its shares on the London Stock Exchange through an initial public offer (IPO). It has chosen London over the alternatives of New York or Amsterdam, due to the Chancellor’s Spring Budget which endorsed proposed rules for loosening listing rules in the UK – these amendments were recommended by Lord Jonathan Hill, former EU financial services commissioner. These include measures that would allow founders to keep more control after going public, which is considered essential by many successful tech start-ups.
No date has been confirmed yet for the IPO, but it is expected to take place during April this year, targeting a price tag of as much as $10bn, according to people briefed on discussions at the food delivery group. This would make it London’s most valuable listing for several years.
The decision to go public on the LSE hands the City a much-needed win over New York or Amsterdam at a time of slight chaotic activity in new tech listings. London has been an obvious venue for Deliveroo, given its roots as a British company and the UK being its largest market. But many European internet companies are looking to New York, where US investors have rewarded new tech listings such as DoorDash and Airbnb with higher valuations than some entrepreneurs feel they could get in London. In the aftermath of Brexit, Amsterdam has also lured high-growth IPOs including InPost, which operates a network of parcel lockers for online retailers.
The new listing rules are unlikely to come into play before Deliveroo completes it IPO, yet the new rules will allow the company to eventually graduate to the London Stock Exchange’s premium listings segment without Will Shu, Deliveroo’s co-founder and chief executive, having to sacrifice control. Among Lord Hill’s recommendations was that of allowing companies on the LSE premium segment to use dual-class share structures, which lets founders hold on to extra voting rights after an IPO. This arrangement is particularly popular in Silicon Valley, with Facebook’s Mark Zuckerberg a prime example of a beneficiary from this structure. When the IPO launches, existing customers can buy up to £1,000 worth of shares each, but the dual class structure of the deal, means that Will Shu’s shares are worth twenty votes each to joe public’s one. Shu said he was “proud and excited” to list in London. The Chancellor, Rishi Sunak, hailed his decision as “fantastic”, calling Deliveroo a “true British tech success story”. “It is great news that the next stage of their growth will be on the public markets in the UK,” the chancellor said in a statement (Financial Times).
Since its creation in 2013, Deliveroo has rapidly grown to be one of the leading fast-food delivery services in the UK, competing against the likes of Just Eat and Hungryhouse. It has become a household name, which has seen huge growth during lockdown, with eating out not an option for most of the year. Its transactions rose 64% in 2020 to £4.1b and its losses fell by 29% from £317m to £223m, signifying the huge benefits the pandemic has had on the firm. Today, over 115,000 restaurants, takeaways and grocery stores are on their app, delivering food using over 100,000 riders to over 6 million customers.
In its pitch to investors ahead of its long-anticipated $10bn initial public offering on the London Stock Exchange, the eight-year old company argues there is still plenty of room to grow in a crowded market. Ecommerce has overwhelmed many markets in the past 20 years, with the food services industry the latest in its reckoning. Growth is a necessity for Deliveroo, with the company deriving half its revenue in the highly competitve UK market, thus stressing the need to enter other international markets. Deliveroo’s main challenge is that its profits are under threat from a resurgent Just Eat. As it builds up its fleet of couriers to offer a Deliveroo-style service around the world, Just Eat spent €712m on delivery costs last year but charged consumers just €231m in delivery fees, eating into Deliveroo’s profits. Just Eat Takeaway.com, is currently valued at £10.1bn on the FTSE 100.
However, there has been some scepticism around the announcement of the float. While the listing will be a much-needed shot in the arm for the City of London, there are some concerns of the valuation of the stock. Deliveroo is understood to be aiming for a valuation of $10bn. This follows a private financing that valued the business at $7bn. This is more than double the Amazon-led investment of 2019. “This valuation of Deliveroo seems excessive for a business which is still many years from profit, especially given that some hold significant doubt whether the home takeaway delivery model can become profitable outside of London,” said Professor John Colley. The valuation has been inflated due to the immense amounts of cash looking for growth technology stocks. In a month where the Supreme Court gave a verdict that Uber drivers are ‘workers’, this may well apply to takeaway home delivery drivers too, potentially driving up Deliveroo’s costs.
Ultimately Deliveroo will have to charge customers and restaurants far more to make a profit, but that brings its own difficulties. For restaurants, margins are already narrow. And at what price do customers simply decide to collect their own meals? Potential investors should also remember that if this listing is under new stock market rules, it may well be accompanied by founder share rights. That means if the company is badly run there is little shareholders can do to change the board.
Time will tell with this IPO. Will it succeed like the US’s DoorDash? Or will it result in a failure, mirroring Uber’s poor performance in 2019?