Deliveroo has hit the market – but it’s not getting the warmest welcome

Deliveroo’s much anticipated £7bn London listing – the biggest in a decade – hit the market today as conditional trading started. To say it hasn’t got off to a good start is an understatement. The company listed at 390p – the bottom end of a range that had already been reduced heavily. But in early trading the share price fell by as much as 30%.

When the food delivery company announced that its IPO would take place in London, the decision was heralded as a “true British tech success story,” by chancellor Rishi Sunak. So this is not the sort of “pop” that the company, the exchange, its IPO investors, or Sunak would’ve been hoping for.

It wasn’t an easy ride to get here in the first place. The listing came amid a furore around its governance and working practices, which forced it to slash its valuation to the lower end of the target range, after it had hoped to achieve a market capitalisation as high as £8.8bn for its debut.

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So why the lower valuation? One of the more headline-grabbing issues has been the wave of fund managers who have said they would not participate in the IPO due to concerns around Deliveroo’s treatment of workers – and its unusual shareholder structure. M&G, Aberdeen Standard, Legal & General Investment Management, CCLA, Aviva Investors all announced they would shun the IPO all together.

The concerns are two-fold. Firstly, there’s the question of “gig” workers’ rights. This is a controversial area and one where governments and courts are paying closer attention. Second, there’s the fact that co-founder and chief executive, Will Shu, will retain control for the next three years, due to his ownership of shares with far more voting rights than the ordinary shares.

Why fund managers are concerned about the IPO

Concerns around the treatment of its workers comes from the fact most of Deliveroo’s workers are self-employed or “gig-economy” workers. As such, this means they are not eligible for the usual benefits enjoyed by permanent workers, such as minimum wages, sick leave and holidays.

This reliance on gig economy workers to thrive as a business represents a regulatory risk, says Rupert Krefting, head of corporate finance and stewardship at M&G. “Deliveroo's narrow profit margins could be at risk if it is required to change its rider benefits to catch up with peers”, he points out.

Some of the scepticism in the market is down to a recent ruling by the Supreme Court on employees of Uber. In a blow for the firm, the court ruled that its drivers are indeed employees and not independent contractors.

Another key criticism of the IPO is the proposed dual-class structure that will give Shu 20 votes per share, rather than one. That amounts to 57% of voting rights.

But fund managers can be forgiven for making their excuses to duck out of the IPO. The truth is that even disregarding the voting structure and the regulatory risk, it’s not easy to make an attractive case for investing in Deliveroo right now. Here’s why.

Deliveroo’s two-part business model

Deliveroo has two core parts to its business model. The first is the takeaway business, arguably the best-known part. The company connects consumers to participating restaurants with the click of a button on any mobile phone or tablet. Deliveroo gets a cut from both the restaurant and the consumer for delivering meals. The second part is its grocery delivery business – it has partnered up with a number of big supermarkets including Waitrose, Aldi and Morrisons.

With most of the world in lockdown and nobody really being able to dine out, it is obvious why Deliveroo’s revenues and transaction numbers have soared in recent months, while the public’s reluctance to go to supermarkets has also been a boon to its grocery delivery business. Yet, even although transaction numbers rose 64% in 2020 to £4.1bn, the business is still loss-making overall.

The bottom line is that fund managers probably steered clear of the IPO because of Deliveroo’s unappealing business model rather than social and governance concerns. The company’s shares looked expensive even after the cut to its valuation. It looks as though those who avoided it will be patting themselves on the back this morning.