What does Deliveroo’s $7.5bn London Stock Exchange listing mean for investors?

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Following the news at the end of last week that food delivery giant Deliveroo has confirmed that it is to float of the London Stock Exchange – but what does it mean for investors?

The LSE listing could value the firm at more than $7.5bn (£5.5bn).

Ahead of the announcement, founder of Deliveroo William Shu, said: “Deliveroo was born in London. This is where I founded the company and delivered our first order. London is a great place to live, work, do business, and eat. That’s why I’m so proud and excited about a potential listing here.”

Commenting on Deliveroo’s announcement, Chancellor Rishi Sunak said: “The UK is one of the best places in the world to start, grow and list a business – and we’re determined to build on this reputation now we’ve left the EU. That’s why we are looking at reforms to encourage even more high growth, dynamic businesses to list in the UK.”

Deliveroo intends to issue shares via a Placing (reserved for qualifying, professional and institutional investors) and a £50m customer offer run by a third-party company, PrimaryBid.

This means that retail investors cannot participate in the IPO through a UK broker but should they be a customer they have the option to take part in the IPO and buy up to £1,000 worth of shares which they can transfer to their broker later.

Ahead of the listing, Business Leader caught up with Susannah Streeter, Senior investment and markets analyst at Hargreaves Lansdown.

Deliveroo’s intention to launch onto the London market is the latest in a steady stream of IPOs in the first two months of 2021, but with its unicorn status, it’s likely to be the biggest coup in terms of size. It’s currently valued around £5 billion after it raised £129 million in investment in January, but is expected to float with a valuation closer to £7 billion.

We are pleased to see this offer is not being restricted to institutional investors, unlike many other highly sought after IPOs of recent months. Although it is a little disappointing a wider range of retail investors will not be able to get involved initially, the company clearly wants to give its customers the first chance of owning a slice of the company, in recognition of their support.

We see the customer offer as positive as we have been calling for IPOs to be widened to allow small investors to take part.  Last month, the CEO’s of HL, AJ Bell and Interactive Investor co-signed a letter to Treasury Minister John Glenn promoting the benefits of retail investor involvement in IPOs and Deliveroo has delivered.

Delivery companies have come into their own during the pandemic as people have had little option but to switch to dining in at home instead of eating out. Deliveroo, has been benefiting from this takeaway trend with rising revenues and clearly the company has judged that the time is ripe to go public. Appetite for a slice of the delivery sector is high, just look at the incredibly successful Door Dash IPO in the US which saw shares rise 86% above their initial public offering price.

However, competition in the sector is fierce, and Deliveroo competes with Uber Eats, Just Eat and a host of others. Profitability can be tough and margins tend to be slim thanks to competition and high variable costs. But the potential is there for strong returns if the logistics can be performed well and a company can establish itself as a fixture of the industry. There is of course a risk that demand for home deliveries will wane once the pandemic has eased. It’s likely that the public will be desperate to eat out as soon as they can, ditching  a knock on the door and a bag of food for a real restaurant experience.

Deliveroo is expected to adopt a dual-class share structure when it lists. People need to be aware if they invest under these terms they don’t have the same voting rights as they would do if they owned shares in other companies listed on the London market.

It is a similar picture with what happened when The Hut Group listed in August last year. It became the biggest float since Worldpay in 2015, but its limited free float and the founder share held by executive chairman Matthew Moulding prevents the shares from qualifying for inclusion in FTSE 100 where it otherwise would be given its market capitalisation.

However if the recommendations in the Hill review of IPO listings in London are brought in, it is likely that Deliveroo would be able to move up to a premium listing. However under the recommendations there would still be limitation to this. Dual class shares would be allowed only for five years and the maximum voting ratio would be 20:1.

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