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Why the wheels came off Deliveroos overheated the IPO | Deliveroo




SOme City Wags dubbed him Flopperoo, while others turned to Deliver-oops. The Dealogic market platform tightened the numbers and came to the conclusion that the 26% drop Deliveroo suffered on its first day as a public company meant that London had just witnessed the least successful stock market float. of its history.

In an internal memo, CFO Adam Miller decided to ease any nervousness among the staff. We have a simple message today: don’t underestimate Deliveroo, he wrote, before listing a series of mitigating factors for this dismal start.

Market volatility, he said, didn’t help. He referred to other European and US IPOs over the past week that had lost ground. A hedge fund also went haywire last week, he added, causing some companies to drop 30% in a single day. And Deliveroos’ peers in the food delivery industry have fallen 10-35% in the past six weeks alone.

Deliveroo, he added, was a young, healthy company that now had well-respected investors in the public markets.

Just in case they still didn’t get the message, he added: Society is not defined by our stock price (good or bad), it is defined by all of you.

But Miller’s soothing words cannot refute the fact that the companies’ entry to the London Stock Exchange did not go as planned and left 70,000 small investors, who racked up $ 50 million, with losses.

Deliveroo had hoped for a valuation of 8.8 billion, but after some City investors expressed concerns about the company, it ended up pricing its shares at the lower end of the suggested range. , valuing the company at 7.6 billion. However, when trading started, the stock price immediately went down, but only as part of conditional trading.

There are several reasons for this poor performance, said analyst Neil Wilson of Aside from the inability to bring multiple large funds on board, the two-class share structure, regulatory uncertainty, general concerns about profitability, and bankers’ miscalculation of pricing relative to broader market demand. , it also looks like a blanket. funds aggressively shorted the stock from day one.

It’s all a problem call, but the two-class action structure is a good place to start.

Chancellor Rishi Sunak rolled out the red carpet for Deliveroo by unveiling plans to change the city’s listing rules and make businesses with a two-class structure eligible for premium FTSE listings.

Will Shu, founder of Deliveroo
Shares held by Deliveroo founder Will Shu carry more votes. Photograph: Nora Tam / Getty Images

This gives them access to a larger funding pool while allowing founders such as Deliveroos Will Shu to retain control through shares with enhanced voting rights. Thus, some shares of Shus carry more votes than others, which gives him more power than other investors with the same amount of shares. This arrangement is not uncommon for American tech companies led by high-stakes founders.

The idea of ​​allowing this in the UK is to encourage tech champions to choose to register in London rather than New York or Los Angeles.

Founded in Chelsea, Deliveroo is a true British success story, to use Sunaks’ words, it was to be at the forefront of companies with flotation projects that would put London on the big tech map and generate serious revenue for bankers and advisers.

Yet the welcome mat established for such equity structures appears to have been one of the biggest detractors from investors.

What’s wrong with an action, a voice? said Sacha Sadan, director of investment management at Legal & General Investment Management (LGIM). If a customer puts 1, why shouldn’t they have 1 economic interest? Seems fair.

It is important to protect minority and end investors against possible bad management behavior which could lead to destruction of value and avoidable losses for investors.

Equally baffling to some was the slight smell of exploitation accompanying every meal, with some of Deliveroos’ 100,000 independent couriers claiming to receive less than minimum wage.

David Cumming, chief investment officer at Aviva Investors, said workers’ rights were one of the main reasons he didn’t invest in the company: Many employers could make a huge difference in the lives of workers whether they guaranteed working hours or a living wage, and how companies behave is becoming increasingly important.

LGIM also highlighted contentious issues regarding workers’ rights, citing the desire to invest customer money responsibly. This ethical concern could also become a financial concern.

The February Supreme Court ruling that the drivers for the Uber taxi app were workers rather than self-employed, could have significant ramifications for all businesses in the small economy. Deliveroo admitted that the possibility of reclassifying its riders as workers poses an investment risk for the company.

High-level pilot suits seem inevitable, as Deliveroo has set aside $ 112 million to fund his defense. The loss of these cases could have seismic consequences on its cost base.

We didn’t invest in it because we were concerned about the combination of valuation and the potential risk to the company’s bottom line if they were to employ all of their riders, said Rupert Krefting, head of finance and stewardship. company at the M&G fund manager.

Deliveroo riders were protesting their pay outside the company's London headquarters.
Deliveroo riders were protesting their pay outside the company’s London headquarters. Photograph: Jonathan Brady / PA

Timing was also a factor. Deliveroo has sold itself as a fast growing tech company with large losses (875 million and counted over the past four years) but well worth the investment because of its prospects as, in its own words, the future. of food.

But with coronavirus vaccines offering a silver lining for restaurateurs, Deliveroo has floated at first moment for about a year when takeout looks like a smaller part of the future than it is now.

That’s an added risk, and no one really knows what consumer behavior will be when we go out, Krefting said. I suspect that once pubs and restaurants reopen, everyone will be rushing out.

There is an irony at the end of the pandemic that poses a risk. Last spring, Deliveroo warned it could be destroyed by the coronavirus, an alarm that saw the Competition and Markets Authority slip through a $ 450 million Amazon-led investment in which the watchdog previously had doubts. Months later, he swept aside the so-called existential threat and got rid of his float, but has struggled to meet expectations precisely because things are now improving on the pandemic front.

The consensus among fund managers and bankers seems to be that Deliveroo was just a little too ambitious on valuation given these headwinds. A number of hedge funds also appear to have spotted this valuation mismatch and bet against the stock, which could worsen its fall.

Many of Deliveroos’ small investors may now be concerned. But that’s not all bad news.

Bloomberg Intelligence analysts point out that the float left Deliveroo with $ 1 billion (the remaining $ 500 million was raised by cashing shareholders) to invest in growth, service improvement and marketing to help it compete. with rivals such as Just Eat and Uber Eats.

Deliveroo may push grocery delivery further, something the UK has become much more accustomed to during the pandemic, as well as building its network of dark kitchens specifically designed for kitchens that are helping to expand its reach geographical. She already delivers groceries to supermarkets such as Waitrose, The Co-op and Morrisons.

It’s also worth remembering that companies like Uber and Facebook have suffered humiliating floats but have become stock market darlings. Looking ahead to Ocado’s stock market debut, which has a lot in common with Deliveroo, a City analyst joked that it starts with an o, ends with an o, and is worth zero.

Needless to say, the $ 15 billion delivery giant had the final say. Don’t underestimate Deliveroo, Miller said. He can still laugh the longest.

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