Deliveroo should be celebrating the launch of a blockbuster IPO. Instead, it is licking its wounds after market volatility and an investor revolt forced it to drop its listing price from a maximum of £4.60 a share to £3.90.
The move wiped close to £1 billion off the company’s valuation and, with the shares falling by over 30 per cent to below £3 in early morning trading, questions have been raised about how appetising Deliveroo’s stock will prove when it begins publicly trading next week. But this will be the least of the company’s worries.
When founder and chief executive Will Shu, who made £26 million from selling down part of his shareholding today, announced Deliveroo’s intention to float, he positioned the move as a way to help people meet one of their most basic needs. Noting that the business is “customer-obsessed”, he said its ambition is to be “the platform that people turn to whenever they think about food”.
That strategy is understandable, given how important a loyal customer base has been for Deliveroo over the course of the pandemic. With lockdowns seeing demand for both its food-delivery and nascent grocery services rocket, the company saw the amount of business transacted on its site soar by 65 per cent in 2020. That pushed revenues to well over £1bn for the first time and, though the company is yet to turn a profit, its losses narrowed from £318m to £226m. Without people and their pandemic needs, those figures would have remained a pipe dream.
The problem is that, while the pandemic has given Deliveroo the momentum needed to get its stock-market listing away, how the company treats its own people is leaving a bad taste in some investors’ mouths. It is well documented that Deliveroo sees its 100,000 riders as self-employed, meaning they have few protections and no employment rights. After fellow gig-economy operator Uber was forced to class its drivers as workers, Deliveroo conceded that “ongoing success in defending our model cannot be guaranteed”. Trying to defend it at all has proved too much for some would-be investors, with a number of big-name fund houses choosing to boycott the IPO.
Aviva and Legal & General -–pension providers that have thrived since the government required employees to be automatically enrolled into workplace funds – are among those refusing to take part. Tim Sharp, pensions policy officer at the TUC, says there is one key reason for this: “It leaves a sour taste in the mouth for Deliveroo to be seeking pension investors’ money while at the same time denying its riders pension rights or indeed other basic employment rights.”
To some extent this boycott is a storm in a teacup for Deliveroo, that does little more than paint those fund houses in a good light. Danni Hewson, a financial analyst at AJ Bell, says it is refreshing to see so many investors put their necks out to highlight concerns about the social side of ESG (environmental, social and governance) investing. But, she adds, the main reluctance may be more fundamental: Deliveroo has given no indication of when it might start to turn a profit.
“This particular stance is really welcome, but it’s kind of green-washing only with the S [social] instead of the E [environmental],” she says. “Ultimately, if Deliveroo had been a different company then they [the fund managers] possibly would not have taken this stance in the way they have. There are an awful lot of questions about when it’s going to make a profit – a lot of these investors are looking for something that gives them an income.”
Either way, for Deliveroo it won’t matter all that much at the moment. The company said repeatedly that three “highly respected anchor investors” – which it has refused to name – participated in today’s launch, together taking 30 per cent of the offered stock. Deliveroo also claims to have seen “very significant demand from institutions across the globe”. Even after dropping its listing price, and despite the shares flopping on launch, the offer has raised £1bn of cash for the firm and half a billion for its early backers. Shu, who would have netted £27.5m if the maximum target price had been achieved, retains just under seven per cent of the company’s shares.
But it won’t be long before Deliveroo’s recent concerns come back to bite it – and it’s all because of the UK government’s newfound tolerance for the other thing some investors hate about the IPO: the company’s two different classes of share. When it comes to making decisions about Deliveroo’s future, holders of the bog-standard A class will be entitled to one vote per share while the gold-plated B shares carry 20 votes apiece. Shu is the only holder of B shares, giving him control over 57 per cent of the company’s voting rights for the next three years (at the end of that period the stock will automatically convert into A shares).
This is a lot of power to give a founder who has no clear path to make his company profitabile. Yet the set-up has been made possible thanks to pending regulatory changes designed to save Brexit Britain’s reputation as a destination of choice for IPOs. A review championed by Chancellor Rishi Sunak has recommended that dual-class companies be allowed a premium market listing – which means inclusion on investor-friendly FTSE indices – despite this going against current rules. It is understood to have been the clincher in persuading Deliveroo to choose a London listing over floating in more founder-friendly New York.
“There’s been a dearth of IPOs in the London market,” says Hargreaves Lansdown senior analyst Susannah Streeter. “This is part of an attempt to persuade more high-growth tech companies to list in London because it means they can list but they don’t lose control.”
A spokesman for Deliveroo says the organisation would study the detail of the reforms before deciding whether to apply for premium status or not. A comment made by Sunak when the IPO was announced – “we are looking at reforms to encourage even more high-growth, dynamic businesses to list in the UK” – suggests the Chancellor expects it will. The good news for Deliveroo is that becoming a constituent of the FTSE 100 would open it up to a highly lucrative index-tracking investor base; the bad is that much of that investor base is made up of the kind of employee-centric, pension-providing companies that have been so vocal about shunning it in the first place.
That investor base would also include funds such as NEST, the £10bn government-backed, multi-employer pension scheme that offers gig-economy workers who cannot access a workplace pension the opportunity to save for retirement. As it is not investing today, a spokesman for NEST declined to comment on the Deliveroo IPO. However, he says the fund has the ability to exclude any index constituents that do not fit with its investment ethos.
“We do have some exclusions in the fund, including coming out of tobacco, [we have] no controversial weapons and we’re in the process of divesting from companies with the heaviest carbon emissions like oil sands, Arctic drilling and thermal coal,” he says. “As a general point, we want to see good corporate practice and labour policies from the companies we’re invested in. We take issues like paying workers fairly very seriously and regularly call on companies to pay people the Real Living Wage.”
Not all index-tracking funds have the ability to make exclusions like that. Tom Powdrill, head of stewardship at Pensions and Investment Research Consultants, says that could prove highly problematic for Deliveroo. “If you look at the taxonomy of how investors influence organisations you have exit or voice,” he says. “If you’re a tracker you can’t exit but [with the dual-class structure] they have stacked the deck against you so you can’t use your voice either. It’s obvious what problems this creates.”
The very investors that have been making noises about shunning it for ethical reasons could soon have a stake in Deliveroo whether they like it or not. The structure of this deal means that funds won’t be able to sell out of Deliveroo or use their boardroom clout to effect change. Having already publicly berated the company over its employment practices, they are unlikely to accept that situation quietly.
When he announced the IPO Shu said that “every single month, every single year, we focus on getting better – sometimes incrementally and sometimes by leaps and bounds”. With changes to the regulatory regime potentially just a few months away, it looks like Deliveroo is going to have to shun small steps in favour of a giant leap if it wants to avoid a shareholder revolt. Sharp at the TUC says the last few weeks have forced the organisation to acknowledge it is “harder to hide when you’re a public company”. It will soon discover it’s a whole lot harder when you’re a premium public company.
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