Food delivery group Deliveroo is set to list on the stock exchange in the next few weeks in what could be the biggest initial public offering (IPO) in London since the Royal Mail’s stockmarket listing in 2013. The company aims to raise £1bn by selling a mixture of new shares, and shares owned by existing investors. And in this case, it’s not just institutions who can get involved – some of the shares will be available to private investors too (as long as you’re a Deliveroo customer – see box below). But should you take the opportunity?
Let’s start with some general bad news. We tend to be wary of IPOs, and we’re warier still when they come in clusters as they are now – the UK IPO market looks set to surpass its best quarter ever by value if Deliveroo gets added to the total before the end of March, reports Swetha Gopinath on Bloomberg. Big IPOs come near market tops, because that’s when investors are at their most credulous and most willing to pay up for shares. That doesn’t necessarily mean the companies are bad – but it does suggest the prices paid are too high. In 2019, US research group Verdad compiled a useful analysis of around 3,700 US IPOs since the late 1980s. After five years, the median company had lost 41% of its value. In other words, the odds of picking an IPO winner are poor.
Deliveroo: not especially appetising
So that’s the “big picture” backdrop. What of Deliveroo’s specific merits? Deliveroo’s revenues were £1.2bn in 2020, deriving mainly from fees charged to restaurants and consumers. The company is still loss-making, though losses narrowed to £223.7m last year, compared to £317.3m in 2019. It also grew fast last year – the total value of transactions processed on its platform rose by 64% to £4.1bn. However, as Russ Mould of AJ Bell points out, 2020 was arguably the ideal backdrop for a big takeaway delivery company, with lockdown forcing consumers to order takeaways rather than eat out. These ultra-favourable conditions will change as lockdown ends. So can the pace of growth continue?
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The biggest problem is Deliveroo’s lack of a “moat” – that is, a durable competitive advantage. As Bill Blain puts it on CapX, the fact is that “anyone can deliver takeaway food”. This is already a crowded sector (rivals include Uber Eats, DoorDash and Just Eat) and there are no real barriers to entry for others. “In a market with room for maybe two competitors, Deliveroo is at number three,” reckons Blain. The risk is that this remains a low-margin business where the winner boils down to who can spend the most on building and maintaining a dominant network of delivery staff, restaurants and customers. Those who still fancy a punt can find out more below.
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How can I invest in Deliveroo?
Deliveroo might not look like the most promising long-term bet (see above). And we note that rival DoorDash, which listed in the US in December, has fallen hard in the last month or so (although it’s still well above its $102 IPO price). But all the same, you might be forgiven for fancying a short-term punt on the stock, in case it gets swept up in a wave of enthusiasm.
So if you want to invest, how do you go about it? Deliveroo plans to make £50m-worth of shares available to private investors. However, you have to have a Deliveroo account and to have ordered at least one takeaway to be eligible to apply. You will be invited to register your interest in taking part in the IPO. Potential investors will be able to apply to buy up to £1,000-worth of shares in multiples of £250 via Deliveroo’s partner on the IPO, Primary Bid.
Of course, if the IPO is oversubscribed – which seems quite possible – then not everyone will get as many shares as they apply for. Deliveroo has said it will prioritise its most loyal customers first. So if you’re not already a Deliveroo customer, there’s no harm in applying, but be prepared to miss out. There is no date as yet for the listing, and the IPO share price won’t be known until closer to the listing.
One other point to note: Deliveroo is following in the footsteps of other big tech IPOs by having two classes of share: one for investors, and one for founder and chief executive Will Shu. Shu gets 20 votes per share – everyone else gets one. We don’t like this. Shareholders should have the power to hold managements accountable, even if they don’t use that power often enough. However it seems to be the only way to attract big tech companies to go public, and defenders argue that it shows commitment from the founder, as opposed to an intention to cut and run. Also, at least Shu’s shares turn into ordinary shares on the third anniversary of the IPO.
