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Deliveroo’s IPO: A Stone Cold Arrival to the Public Market - Myles Kelly

In order to contextualise what in fact Deliveroo has subscribed itself to, the nature of Initial Public Offerings (IPOs) must be qualified. The basic IPO mechanism can be summarised as the process of offering shares of a private company to the public to raise capital from public investors to provide a platform for future expansion. Having understood this, we can now delve into Deliveroo’s IPO.

Deliveroo purported that its IPO on the London Stock Exchange (LSE) is London’s biggest in a decade with a hoped £8.8 bn valuation, and that it would be both the largest tech company IPO in London by market capitalisation and the largest IPO of an online food delivery business outside of the US. Following the listing on 31st March 2021, however, it has been referred to as the ‘worst IPO in London’s History’; the share price had dropped 26 % from its initial 390p price by the end of the opening day, wiping almost £2bn from its opening £7.6bn market capitalisation. Given the tumultuous time that the share price faced, this article will first seek to explore the reasons for Deliveroo’s listing on the LSE, before then considering the reasons behind the mismatch in pricing and what the impact of this could be for future listings on the LSE.

The IPO: Deliveroo’s Motive for Listing on the LSE

Deliveroo founder Will Shu, a former investment banker, opted for listing on the LSE (as opposed to other stock exchanges such as the NASDAQ) as it was in London where the idea for the company was conceived and so believed that the UK market would be a natural progression for growth outside of London, as opposed to the 13 other locations in which it operates. In addition, historical market conditions appeared favourable, with high-growth tech and consumer internet companies accounting for 40% of the capital markets raised in London 2020. Despite these two factors, it is necessary to question the exact justification for this listing. Deliveroo has a dual-class share structure and as regulation stands currently, this structure prevents companies from listing on the ‘premium’ segment of the LSE. It would therefore appear that Deliveroo’s IPO looked far from perfect even before its debut and that there were foreboding signs of what was to come.

The Issues Underlying Deliveroo’s ‘stone cold’ arrival to the Stock Exchange

With such a mismatch in pricing expectations, I believe it would be wrong to put all the blame on a single factor. Rather, I believe, that there were several contributory factors, each of which merit consideration in their own right.

Deliveroo’s Dual Class Share Structure

As alluded to earlier, Deliveroo has a time-limited dual class share structure and this means that the company has currently issued two share classes (although it plans to revert to a single-share class system after three years on the stock market). The difference in share classes means that one type of class retains greater voting rights, with the consequence that Deliveroo co-founder and chief executive Will Shu has retained 57 % of voting rights. Having a dual class stock is controversial as the founder is able to access capital from public markets at minimal economic risk whilst simultaneously the majority control that the founder exerts helps safeguard against activist investors and prevent potential takeovers. It was for this particular reason that many of London’s biggest investors, such as Legal and General Investment Management, failed to back the IPO which is indicative of the current reticence amongst British investors ‘to invest in any system that isn’t one share, one vote’.

The Impact of The ‘Uber’ Ruling and Profitability Concerns

Another concern surrounding Deliveroo was the profitability of its business model given that it made a £224m loss during 2020 despite rising demand for takeaways during lockdown, a concern only exacerbated by the ‘Uber’ ruling (Uber BV and others v Aslam and others [2021] UKSC 5). Deliveroo’s business model relies on levying commissions against restaurants and using self-employed gig economy workers to deliver the food. However, following the ruling by the Supreme Court that Uber drivers are not self-employed because Uber controlled much of their work, allocating their customers and dictating their fares, Deliveroo is at risk of facing similar legal challenges. It is this risk of increased regulatory burden which has meant that equity investors, amongst other things, worry that the extra wage costs have the potential to destroy the profitability of what is already a low-margin business.

An Instance of Missed Timing: Rising Bond Yields

A final reason behind the disappointing listing was that the offer proved to be poorly timed with the market appetite for tech stocks waning as bond yields rose in anticipation of interest rate increases. By way of context, there is an inverse relationship between bond price and bond yields such that when interest rates rise, bond prices fall and relative yields increase as some investors sell off bonds in search of better vehicles of return. Bonds are a type of loan typically made by a government which offer an investor a fixed-rate interest income (coupon) and the owner is only entitled to recover the value of the bond (the principal) upon its maturity. There is an anticipation of interest rate rises as global financial markets have been unsettled by a sharp rise in inflation expectations following a vaccine-fuelled improvement in economic outlook and a belief that monetary policy will be imminently employed to combat this. Some investors are subsequently turning towards secure high-yield bonds as illustrated by the rise in yields on 10 year gilts from 0.4% to 0.8%. In addition, Deliveroo was listing at a time not only when other recent IPOs had struggled, but also when the vaccine rollout was making takeaway meals look like a smaller part of the future than they are now. Deliveroo could not have gone public at a worse time.

What does the future of listing on the LSE hold?

Lord Hill’s Review of Dual-Class Listing

The UK government is seeking ways of making listing on the LSE more attractive and one method that it is actively considering is an overhaul of its listing rules to allow companies with a dual-share structure to be admitted to the LSE’s ‘premium’ segment. Current UK regulations mean companies which possess a dual-class share structure are only allowed on the standard listing of the London exchange but not the premium segment that allows entry into the main FTSE indices, such as the FTSE 100. Rishi Sunak has subsequently endorsed Lord Hill’s review which recommends a relaxation of this rule in order to launch a post-Brexit fightback by the City of London and attract the many tech companies who opt to instead list in the US where dual-class shares are common. While this deregulation will be implemented too late for Deliveroo’s IPO (who listed irrespective of this forthcoming relaxation), it is questionable whether this will actually increase the attractiveness of the companies listing on the LSE to UK investors given that Janus Henderson Group Plc and Universities Superannuation Fund, the UK’s largest private pension manager, has actively spoken out against this. Without support from investors, companies will not choose to list on the LSE. It will therefore be necessary to see whether the several changes proposed by Lord Hill will manifest in increased listing activity or whether there exists an inherent, unchangeable reticence amongst investors for these share structures.

In conclusion, I believe the fact that the Deliveroo listing was a ‘stone cold arrival’ to the public market does not mean that the UK will be unable to fend off competition from the US and exchanges such as Amsterdam in attracting high-growth companies. It is instead arguable that the architecture of the Deliveroo listing was flawed and that this led to its demise rather than an inherent unattractiveness of listing on the LSE. Hence, there is cogent evidence that business confidence still remains high with James Watt, founder of the brewer BrewDog, already openly saying that he would still prefer an UK listing even after Deliveroo’s ‘debacle’ to listing in the USA.

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