Little appetite following Deliveroo IPO amidst concerns around worker rights

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Deliveroo made its stock market debut today but how has it performed and what are the key points you need to know.

  • The shares have been priced at £3.90, giving the company a market capitalisation of £7.6bn.
  • Conditional trading in Deliveroo shares began at 8am this morning.
  • Unconditional trading, when the shares can then be held in an ISA or SIPP, is expected to begin on 7 April 2021.
  • Last week, the company estimated a price range of between £3.90 and £4.60, but narrowed that to between £3.90 and £4.10 on Monday, due to ‘volatile’ market conditions.

On how it has performed, Professor John Colley, Associate Dean of Warwick Business School and an expert on IPOs, comments: “It is little surprise that investors appetite is limited for the Deliveroo IPO. It is a narrow margin loss-maker that is likely to face higher costs due to worker’s rights across Europe. There are also concerns as to whether this type of business model can ever return much profit. It would have to deliver a lot of meals at high margins of which there is no sign yet.

“Another major issue may well be the governance concerns relating to founder shares voting power. In the UK investing institutes are more concentrated and are used to having a say in changing management if a business is badly run. So being lumbered with a founder they can’t shift however bad the performance will not go well.

“A number of potentially very large investors decided to sit this one out. Those who invested for the price ‘pop’ have paid the price in losses. This does not augur well for future tech or gig economy launches in the UK. Nor indeed SPACs which again are likely to be seen as poor value and high risk by late investors in the UK.”

Russ Shaw CBE, Founder of Tech London Advocates and Global Tech Advocates, comments: “As the City prepares for a record year for tech listings, it is testament to the maturity of the London tech sector that Deliveroo has chosen the capital as its IPO home. The LSE has not seen a listing of this value in a decade and with London determined to cement its status as a prominent post-Brexit tech hub, Deliveroo’s IPO is a landmark moment that will hopefully encourage other scale-ups to float here.

“As we saw in the recent Lord Hill Review, relaxed rules around dual class share structures and SPACs, which are particularly attractive to younger tech companies, could be a key factor in easing the path to future tech listings on the LSE. Hopefully, commitments like the one Deliveroo is making this week can also demonstrate that large tech firms are confident in UK tech, further highlighting its potential as a destination for international scale-ups, not just those that are grown domestically.”

Sophie Lund-Yates, Equity Analyst at Hargreaves Lansdown, also comments:  “Deliveroo’s price isn’t quite as tasty as it was hoping for, coming in at the lowest end of an already narrowed range. This isn’t hugely surprising given the substantial background noise surrounding the company. The biggest concern is regulation around worker rights. The flexible employee model of Deliveroo’s riders is a huge pillar of the group’s plans for success.

“If forced to offer more traditional employee benefits, like company pension contributions, Deliveroo’s already thin margins would struggle to climb, and the road to profitability would look very tough indeed. Throw in the recent developments at Uber, and general market volatility, and the net effect is one of increased anxiety. Sadly for the group, anxiety doesn’t tend to inflate share prices.

“Deliveroo is yet to turn a profit, which makes it very difficult to value on a traditional basis. But a market cap of £7.6bn means the company’s worth 6.4 times last year’s revenue, which is some way above rival Just Eat’s 4.8 times, despite the lower price. That means there’s pressure for Deliveroo to deliver the goods, or its share price will be in the firing line.

“Some of the excitement is justified. Deliveroo has been seriously buoyed by lockdowns, and as restrictions ease, we could see a permanent increase in demand for delivered food. This is one of Deliveroo’s strengths – it offers higher quality restaurant options than some peers, which, coupled with its personalised app content and hyper-localised delivery approach, could hold it in better stead.

“The cash hoard from the IPO will be used to fund expansion too, particularly in areas like its delivery-only ‘dark’ kitchens, which offer restaurants a way to expand without having to invest lots of cash. It could also be used to pay for acquisitions. All in, Deliveroo should have decent firepower to chase growth.

The pandemic has offered a structural growth opportunity, but it’s worth asking if lockdowns mean things are as good as they will ever be for a takeaway service. The longer-term outlook depends on how demand holds up in a post-pandemic world, and if that road to profitability looks any clearer.”

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