Deliveroo’s IPO

By Alexis Bernet, Olivier Baverez (HEC) and Ratish Singh, Luc Roberts (University of Warwick)

Summary of IPO


Following eight rounds of funding since 2014 which last valued the business at £5.1 billion, Deliveroo’s looked to cash in on the pandemic-driven boom in the online food delivery sector. The IPO was the largest on the London Stock Exchange in over a decade, both by market capitalisation and the £1.5 billion in capital raised. Alongside the company and its executive team, Amazon also sold Deliveroo shares in the IPO, reducing their stake from 16% to 11.5%.


The listing follows a landmark UK court ruling against Uber over the treatment and compensation of their drivers. In the run-up to the IPO, several large UK asset managers such as Legal & General and Aberdeen Standard Investments shunned Deliveroo, citing concerns surrounding both its labour practices and the company’s dual-class structure. This led to the IPO is priced at the lower end of the initially proposed range at £3.90 a share, valuing Deliveroo at £7.6 billion.


On the day of the listing, Deliveroo saw billions shaved off its market cap within minutes of the opening bell with shares falling by up to 31%. The dramatic failure of the IPO deals a blow to City regulators who are desperately trying to make London an attractive place for tech IPOs. Despite this, it is likely the failure of the listing was caused by bad advice and the core issues with the Deliveroo business model.


Company and IPO Profile:

  • Sector(s): Online Food Delivery

  • Exchange floated: London Stock Exchange (LSE:ROO)

  • Amount raised: £1.50B

  • Offered price and number of shares: 384.6M shares

  • Over-allotment option: 10% (38.5M shares)

  • Equity offered: 20.0%

  • Valuation and relevant multiples at IPO:

- Market Capitalization: £7.60B

- EV: £6.17B

- EV/Revenue: 8.00x

- EV/EBITDA: -19.79x

  • Coordinators/Advisors:

- Joint Bookrunners: Bank of America, Citigroup, Jefferies, and Numis Securities

- Joint Global Coordinators: Goldman Sachs and JP Morgan

  • Notable investors: Amazon, Index Ventures

Strategic Rationale


Apart from the partial exit for investors Amazon and Index Ventures, Deliveroo plans to utilise the capital injection to enhance its core marketplace while continuing to develop growth businesses.

Firstly, it aims to improve the marketplace by investing in technology to halve costs through automation of food production and delivery. Recent initiatives such as automated food markets in Singapore that reduce costs by removing brick-and-mortar expenses will be trialed in Western markets. Secondly, the growth businesses Deliveroo Editions (turnkey solution) and Signature (logistics solution) are attractive opportunities that the company can introduce to new markets.

Even with volatile IPO markets with more than half of the global tech IPOs pricing in the lower third of their announcement price range, the timing can be considered appropriate in light of Deliveroo’s losses combined with good pandemic performance.


Market Reaction


Build Up

Founded in 2013 by Will Shu, Deliveroo carried out its first fundraising one year later in Series A from two Venture Capital funds: Index Ventures and Hoxton Ventures. The strong and rapid organic growth of the promising company then raised investor’s appetite and large institutional investors came up to take a stake in Deliveroo through the different financing rounds. Fidelity Services, T. Rowe Price, Bridgepoint, and Amazon for example took minority interests in Deliveroo. On March 8th, 2021 Deliveroo unsurprisingly announced its intention to go public in the London Stock Exchange. The highly-expected IPO, valuing the company at £7.6 billion ($10.46 billion) with an offer price of 390p, the biggest operation in the UK stock market in ten years, was launched on the 31st of March. The company described as a “true British tech success story” by the UK finance minister Rishi Sunak, is now trading in the London Stock Exchange with the ticker symbol “ROO”.


Launch

The stock (LON:ROO) plummeted by around 30% within minutes of its launch before recovering slightly during the eventful trading session and closing at 287.45p (from 390p), down 26.3%. Deliveroo’s sharp drop has recorded the worst first trading day in the London Stock Exchange in the history of listings of companies valued more than $1 billion. Among the reasons that drove the stock down are investor’s serious concerns on working conditions set by the company and the frozen capital structure locked by Will Shu who will get 57.5% of the voting rights during the three next years despite his only 6.3% stake in Deliveroo. According to some analysts covering equity capital markets, this entry crash is a warning signal for other companies of this sector planning to go public. Indeed, investors may see the economic recovery as an opportunity to position themselves in more traditional sectors, then turning away from the “work-at-home” trend.


Potential Risks and Downsides


Deliveroo’s IPO should have been a celebration of London’s Finance. The initial offering gave Deliveroo a valuation of £7.6bn, which represents the biggest IPO since Glencore in 2011. This IPO was meant to attract tech firms going public in the City and to embody UK post-Brexit ambitions. Nevertheless, the big failure of the IPO (a banker called it “The worst IPO in London History”) may sharply discredit London while many companies hesitate between New York, Amsterdam, and London for going public.


The first days of trading were reserved for institutional investors, but the trading volumes were far below expectations. Many big investors in London did not take a stake in Deliveroo. For instance, Legal & General and Aberdeen Standard Investments did not participate in the IPO, arguing it was too risky. They especially disapprove of the governance of Deliveroo, based on a dual-class structure, a very common structure for Silicon-Valley companies (like Facebook) but unusual in London. British investors do not like the system where the founders of the company have shares associated with a greater vote. London did not adapt itself to this type of companies and many similar firms may choose another place to go public as Listing a dual-class structure on the premium segment of the LSE is still prohibited and London-based investors disapprove of this dual-class structure.


Meanwhile, New York attracts most of the tech companies going public. The city enjoys more flexible IPO rules and the boom of SPACs. Listing in the US attracts tech founders because the rules allow them to keep control of the company. The Deliveroo flop may convince the tech unicorns in Great Britain (more numerous than in France and Germany together) to go to New York. This also obviously gave a bad image of Deliveroo. In December 2020, Doordash made its IPO in New York and its share price soared more than 86% on its first day. Many investors could have the image that Deliveroo was too late to go public and did not enjoy the soaring market of the end of 2020. The IPO also failed because of the fears about the business model of Deliveroo, based on the gig economy. Uber recently faced British justice to consider drivers as workers and to pay them the minimum wage. Deliveroo may face a similar ruling, which raises questions about their model.

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