On March 15th, 2021, Deliveroo confirmed its intention to undertake an initial public offering (IPO) on the London Stock Exchange (LSE). With the last round of private funding providing a valuation of over 5 billion GBP, and rumours of a 7 billion GBP valuation target, the transaction has the potential to become one of the largest London based IPOs in recent years. As well as its size, also of note is the somewhat controversial dual class share structure being proposed. More common in America, this is a structure which allows founders to retain better control of their businesses after going public, without needing as large an ownership stake. This listing may be set to have longer-term impacts as it coincides with proposed UK deregulatory efforts; both investors and the government are likely to be watching the transaction closely.
Starting out as an online food delivery service in London, Deliveroo now operates in over 800 locations across 12 countries, and has expanded into the groceries market, delivering from supermarkets such as Waitrose, Sainsburys and Aldi. They also run an ‘Editions Kitchen’ service, allowing delivery-only kitchens to sell through their app. Despite strong competition from firms such as Uber Eats and Just Eat, Deliveroo has remained in business, and in 2017 Deloitte ranked it the UK’s fastest growing technology company, with a 4-year revenue growth of 107%. However, as is common amongst high growth tech companies, profits have been slow to catch up. It was only in 2020 that they first made a profit, with 6 of the months ending in a net gain. Additionally, the year as a whole still resulted in a 226 million GBP loss, thus continuing the trend from previous years, such as in 2019 where the loss was even larger at 317 million GBP.
Despite the losses, Deliveroo remains confident in their future, forecasting a 30-40% rise in customer spending in 2021, and an eventual move into profitability sometime later. Similarly, large scale investment from companies such as Amazon, who led a 414 million GBP funding round last year, suggests it is not just Deliveroo who is confident in their prospects. Likely contributing to the enthusiasm regarding the firm is the precedent set by the recent DoorDash IPO in New York. Its similarities to Deliveroo as a food delivery firm meant that when it reached a market valuation of over 43 billion GBP on its first day, it set an example Deliveroo seems to be keen to replicate. However, not everyone saw DoorDash’s IPO as a good sign. David Trainer, CEO of market research firm New Constructs, called it “the most ridiculous IPO of 2020”, citing amongst other issues, the company’s lack of profitability. Additionally, despite providing those who bought in at the IPO, for 102 USD per share, or already held shares a positive return, subsequent investors had much less favourable conditions. As of the 19th March 2021, the market closing price of 135 USD represents a fall of almost 30% from the closing price on the day of the IPO. Furthermore, the day’s low of 127 USD represents the lowest price on record in the open market. Thus, predictions for the long-term outlook of Deliveroo’s IPO seem less certain.
Deliveroo’s proposal, with its dual class share structure, roughly coincides with a report by the former UK European Commissioner Lord Hill, commissioned by chancellor Rishi Sunak, portraying such structures favourably. Within the report, he recommends dual class share structures be formally allowed in the premium listing segment of the London Stock Exchange. Currently, companies wishing to offer dual classes of shares must use the “standard” listing regime, forfeiting benefits such as eligibility to be included in the FTSE indexes. Thus, this means Deliveroo is planning a standard listing as they want to create a class of shares (Class B) with 20 voting rights each. This would allow the founder, Will Shu, to keep control of the company, through sufficient voting rights, without needing to hold a majority of the shares, as he plans to be the sole recipient of this class. For other investors this usually means less control, and possibly more risk as a result. But it could also lead to greater long-term returns, as a founder/CEO with more control may be better equipped to implement long-term growth strategies, that potentially impatient shareholders might not. Even if this is not the case, with the Class B shares reverting to Class A (one voting right per share) 3 years after the IPO, potential investors would not have to surrender control for long. This time limit might therefore be seen by some as a compromise between founder vision and shareholder accountability.
In conclusion, Deliveroo’s planned IPO may, if it proceeds similarly to DoorDash’s, be a profitable investment for those in the primary market, provided there is enough demand in the secondary to keep the price above its initial offer. However, uncertainty regarding their ability to generate a profitable year, and the prevalence of strong well-funded competition may cause investors to act cautiously. Thus, the success (or failure) of the IPO could depend heavily on investor sentiment regarding Deliveroo’s rank amongst the many other online food delivery services. Additionally, the success (or failure) of the IPO may influence how dual class share structures are in the future treated in the UK, as Chancellor Rishi Sunak said recently that the FCA would be “consulting on [Lord Hill’s] proposals very shortly”. Thus, as a high-profile UK IPO with a dual class share structure, the details of how it unfolds may ultimately end up being used as evidence in the FCA consultation, potentially influencing the outcome.
By David Bendle
Sector Head: James Float