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Deliveroo fails to deliver the goods


Market Update

Deliveroo fails to deliver the goods

At the end of March Deliveroo went public with a UK listing and a price target of 390 pence per share, the lower end of expectations. But this still valued the Amazon-backed company at around £7.6 billion, way above its estimated value of £3 billion just four months ago.

Poor start

Unfortunately, the stock fell 30% soon after opening, meaning a paper loss for those retail investors (which include Deliveroo customers and its top drivers) unlucky enough to have been tempted in to pay the IPO price. The stock failed to recover its mojo on its first day, making its debut an undoubted flop by anyone’s standards. Trading in the stock was restricted until 7th April meaning retail investors were unable to trade it. But it is instructive that institutions who were able to buy, decided to shun the takeaway and grocery delivery app. This now looks like a wise decision as Deliveroo spent most of its first morning as an unrestricted stock trading around 288 pence, or around 25% below its IPO price. This is all being viewed as a big embarrassment for the London Stock Exchange which was looking forward to its biggest IPO in nearly 10 years, and for UK Chancellor of the Exchequer Rishi Sunak, who dubbed it a successful British tech story, and a harbinger of more big tech IPOs to come.

Of course, you can’t judge a company by its first few days of trading. After all, Facebook had a disastrous launch, and a torrid few months after that.  But if an institutional investor can go into the market after a couple of hours and purchase shares 30% below the IPO price target, then something has gone wrong.

Controversy

Although heavily touted, the Deliveroo launch was not without controversy. Several big funds including Aviva, Legal & General, M&G and Aberdeen Standard Life shunned the IPO citing concerns over the treatment of the company’s drivers – an example of how ESG (Environmental, Social and Governance) standards are influencing investor behaviour. This undoubtedly had an impact on share take-up.

In addition, Deliveroo’s management and underwriters decided on a dual-class structure for the stock. Not only does this favour the founder whose shares have twenty times the voting power of others, but it also bars the company from the FTSE 100, so there won’t be any buying interest from passive tracker funds.

A bunch of Deliveroo riders have a rest on a wooden bench outside a coffee shop

The question I’m asking is would this have happened in the US? Is the appetite for IPOs considerably stronger there than in the UK? Well, the answer to both is probably ‘yes’. But maybe a lot of the problem is the difference in how UK investors perceive a company like Deliveroo compared to those in the States.

Low or high tech?

Deliveroo paints itself as a tech disruptor, just like Uber does. But to many people like myself, Deliveroo is a company with a young workforce dashing around at night on unlit bikes with boxes on their backs in the posher neighbourhoods around London. That doesn’t seem very high tech to me. Unlike Uber that has scalability, Deliveroo probably won’t work outside a big metropolis like London. I can’t imagine swarms of riders in places like Slough, High Wycombe, or Swindon. Also, it has plenty of competition from the likes of Just Eat and Uber Eats, on top of which it doesn’t make money. While that’s also been the case for other tech companies, such as Uber and Amazon, what will Deliveroo’s future be like once lockdown ends?  The boom in tech stocks during the lockdown has come on the backdrop of ultra-low interest rates. This means easy financing for loss-making companies like Deliveroo. But with the vaccination programme up and running, and the global economy recovering, it could be that interest rates could soon start rising.

All about the data

Of course, there is another angle. Even if it doesn’t look like it in public, Deliveroo really is a tech company. Just look at the data it will have collected concerning our social groupings and eating habits during the pandemic. And the company is perfectly placed to measure how that will change once the pandemic is over. That data is valuable, and that’s what investors eventually twigged with regards to Facebook. And if central banks continue to make it clear that they’re not about to tighten monetary policy anytime soon, the outlook for tech could quickly improve again.

So, a disappointing launch and a bit of an embarrassment all round. But overall, I doubt it will really damage The City as a place to do business. And who knows, those early investors could well end up booking a profit - if they hold on long enough.


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