Coming in at the top of the tech boom with a rich valuation and adopting a controversial dual-class share structure have created the perfect storm for Deliveroo which flopped on its debut on the London Stock Exchange.
When the food delivery start-up announced plans to float in early March there were hopes it would usher in a new era of major tech companies flocking to the City.
But its dismal debut on Wednesday seems to have put the kibosh on that. Within the first 20 minutes of trading Deliveroo’s shares had plunged as low as 271p, 30% below its initial offer price of 390p. It closed out trading at 284p a share, down 14%.
MFM UK Primary Opportunities manager Oliver Brown says Deliveroo’s IPO is the biggest flop he’s seen in his 15 years in the investment industry.
“I’m actually quite stunned,” Brown says. “I’ve never seen an IPO down 22% in its first morning of trading.”
Even though Deliveroo had set its listing price at the bottom of its initial range earlier this week, the food delivery firm was multiple times oversubscribed, Brown notes. “Where on earth has all that demand gone?”
Rare for investors to take such a public stance against an IPO
The public backlash from some of the UK’s biggest investment houses certainly didn’t help.
Legal & General Investment Management, Aviva Investors, M&G Investments, Aberdeen Standard Investments and BMO Gam are among the fund groups that said they would be shunning Deliveroo’s listing. Chief among their concerns were the company’s dual-class share structure, which would concentrate power in the hands of founder Will Shu, and the treatment of its employees.
And this week Scottish Mortgage frontman James Anderson also gave the London start-up the cold shoulder, as did ESG investor Edentree Investment Management, which gave a searing indictment of Deliveroo’s business practices.
“The rise of the S in ESG during the pandemic has highlighted social inequity and injustice within society,” Edentree Sustainable and Responsible UK Equity fund manager Ketan Patel said in a statement.
“The Deliveroo business model is best characterised as a race to the bottom with employees in the main treated as disposable assets which is the very antithesis of a sustainable business model.”
Boohoo and Uber have drawn attention to employment practices
Willis Owen head of personal investing Adrian Lowcock says it is “fairly rare for fund managers to take a strong collective stance” regarding a company’s IPO and to publicly make their opinion known.
The fact Deliveroo’s treatment of its employees is being cited as a reason for not investing is “hugely significant” as these issues have been overlooked in the past.
But he adds: “These issues have become more prominent in recent years with the Boohoo scandal last year and Uber earlier this month settling its high court battle over workers rights in the UK.”
See also: Boohoo shines spotlight on fast fashion in funds peddled as responsible investments
Deliveroo just missed out on the tech boom
There’s also a sense that Deliveroo missed out by arriving at the tail end of the tech-driven growth rally.
“It is a concern that this may turn out to be the top of the tech technology boom that we’ve had,” Brown says. “And if that’s the case, watch out Nasdaq, watch out Scottish Mortgage.”
When Deliveroo’s US equivalent Doordash listed in December its shares spiked over 85% on its first day of trading on the New York Stock Exchange. But its shares have lost over a third of their value since peaking in mid-February.
Deliveroo’s closest competitor Justeat, which floated in 2014, has also seen its share price plunge 20% year-to-date.
“With 20-20 hindsight you could think, well, perhaps this is inevitable,” Brown reflects.
‘Pressure for Deliveroo to deliver the goods or its share price will be in the firing line’
Deliveroo’s punchy valuation might have also dissuaded investors from diving in.
Even on the low end of its target range Deliveroo was valued at £7.6bn despite not yet turning a profit. That is 6.4x last year’s revenue, Hargreaves Lansdown equity analyst Sophie Lund-Yates notes, which is much higher than Justeat’s 4.8x valuation.
“That means there’s pressure for Deliveroo to deliver the goods, or its share price will be in the firing line,” she says.
Brown himself did not participate in the IPO because he thought the valuation was too high.
Deliveroo gets a very public no from the Big Boys
Boring Money CEO Holly Mackay thinks the answer lies somewhere in between.
“The sceptic will say that the larger firms are not investing because of punchy valuations – and competition. The optimist may argue that it is an ESG-led decision based on poor treatment of delivery riders.
“Maybe a happy medium is the pragmatist who argues that ESG has highlighted a potential regulatory risk which is deemed to pose a threat to future valuations. And as such, does it matter whether the ESG- induced thought process was ‘let’s stick up for workers’ or ‘let’s avoid unpalatable risk’.
The outcome is the same, she says: “Deliveroo gets a very public no from the Big Boys.”
Dual-class shares does not sit well with UK culture of one share, one vote
Deliveroo’s dreadful start can also be read as UK investors’ wholesale rejection of dual-class shares.
Days before Deliveroo announced its flotation a report by Lord Hill called for the relaxing of listing rules including allowing dual-share arrangements to trade on LSE’s premium segment.
LGIM cited Deliveroo’s dual-class structure, which gives founder William Shu’s shares 20 times the voting power of other investors, as one of the reasons it refused to participate in the IPO.
“As a matter of principle, we continue to push the FCA on the issue of ‘one share, one vote’ and have strongly recommended that companies with unequal voting rights structures are not included in the Premium Indices,” a spokesperson for the company said.
“It is important to protect minority and end-investors against potential poor management behaviour, that could lead to value destruction and avoidable investor loss.”
See also: Lord Hill review sparks concern over loosening of listing rules
While dual-class structures are popular in the US, having been used by Facebook and Google parent Alphabet, Willis Owen head of personal investing Adrian Lowcock says this approach doesn’t align itself with the UK culture of one share, one vote.
“The dual class share structure has worked in the US and allows the entrepreneurs to drive their businesses to huge growth, but I think culturally it may struggle to find wider acceptance in the UK,” he says.
“However, if businesses that use it can deliver returns and profit for investors and give them access to high growth companies at an earlier stage then we may see people accept it, although it does make share ownership more complicated for investors and fund managers.”
UK investors can’t complain about London losing listings and dual-class shares
But Brown notes other businesses like the The Hut Group, which IPO’d last October, have squeaked by despite having a dual-class structure, receiving relatively little media attention or backlash.
Brown thinks UK investors can’t complain about London losing listings to New York, while also moaning about the dual-class structure.
“These rights do not carry on forever. It stops the business being sold prematurely without the founder’s consent,” he says.
Though he understands why shareholders want equal representation, equally he understands why founders would want to ensure they have control over a limited timeframe after their business floats.
“It’s their baby I guess really and they’re saying look, I spent all this time building up, yes, I’ve come to the public markets and I have to respect that, but I do not want this company being taken away from me just when I’m getting some new capital and I think the company’s got a lot further to go.”
