In recent quarters, a large number of US companies have gone public. Many, such as Airbnb (NASDAQ :), Asana (NYSE :), DoorDash (NYSE :), Jfrog (NASDAQ 🙂 and Snowflake (NYSE :), have chosen the traditional initial public offering (IPO) route.
However, others have completed reverse mergers with Special Purpose Acquisition Companies (SPACs). Examples include Arrival (NASDAQ :), ChargePoint (NYSE :), DraftKings (NASDAQ :), Immunovant (NASDAQ: ), Plby Grou p (NASDAQ :), Repay Holdings (NASDAQ 🙂 and Virgin Galactic (NYSE :). On the other hand, Palantir Technologies (NYSE 🙂 has chosen the direct listing route (DPO).
But 2021 promises to be a hot year for IPOs, especially in the UK. Today we look at a company that went public earlier this year: online food delivery company Deliveroo (LON :).
No tasty returns delivered yet
Founded in In 2013, Deliveroo, a well-known UK brand, had its IPO in London on March 31st. The excitement prior to the first day of trading was impressive. After all, ordering takeout was the go-to activity during the pandemic lockdowns.
Recent statistics show that with about 25 million users "the UK [is] is responsible for about 40% of all European takeaway revenues". For example, Just Eat Takeaway (LON 🙂 (OTC :), a member, has seen significant sales growth during the pandemic. JETJ shares are up more than 16% in the last 12 months.
In August 2020, the UK Competition and Markets Authority (CMA) approved Amazon's (NASDAQ 🙂 16% ownership in Deliveroo, a development that clearly increased the hype surrounding the company's IPO. In his analysis:
“The CMA eventually found that this level of investment will not substantially reduce competition in either market. However, if Amazon were to gain more control over Deliveroo, for example by acquiring a controlling interest in the company, this could prompt a further investigation by the CMA. "
After the IPO, Deliveroo made headlines, but not for all the right reasons. The company hoped the stock would sell around 390p (or about $ 5.35), at the lower end of the 390p to 460p range initially expected. But on March 31, the shares closed at 287 pence. Now the stock is trading around 282p ($ 4.15 for US-based stocks).
The market capitalization is currently £ 5.2 billion (or $ 7.2 billion). In early 2021, Deliveroo's debut was hailed as possibly the largest IPO to be welcomed in London. Still, it turned out to be the worst in recent history.
Before that, in 2011, commodity group Glencore (LON 🙂 (OTC 🙂 was in the spotlight as the biggest public offering that turned into a disappointment. Glencore had faced controversies at the time, particularly in environmental, social and governance issues. The shares were also priced at the lower end of their target. GLEN shares never hit the IPO price of 530p, hit lows below 80p and are currently hovering at 290p. Deliveroo would certainly hope this isn't the case for ROO shares.
Pricing and Corporate Governance Concerns
For the past 10 days, analysts have debated why this highly anticipated IPO had not been well received. Many cite valuation levels as the main problem. Although Deliveroo had priced the stock at the lower end of its target market, it was still high to investors' tastes. As the UK prepares to lift lockdowns and allow greater opening of non-essential businesses, takeout order volumes may also start to decline.
Despite the growth of the online ordering market during the pandemic, the group has yet to make a profit in this competitive segment. In fact, prior to approving Amazon's investment, in dealing with the CMA, Deliveroo had argued that it could potentially fail without Amazon's backing. Not all fund managers are impressed with the fundamentals of the loss-making delivery platform.
The other issue is its corporate governance, which is the working conditions for its drivers. In February, the UK Supreme Court ruled that Uber (NYSE 🙂 drivers in the UK are workers, not independent contractors.
Given the legal defeat for one of the gig economy's biggest names, there is now the question of whether Deliveroo should perhaps improve pay and conditions for its delivery drivers. Management argued that this had no impact on the group, but it appears that some investors thought otherwise. If Deliveroo's costs were to increase due to higher driver costs, it would extend the time before it would be profitable.
Finally, we must remind investors that there is a two-class share structure. This scheme gives the holders of one share class more voting rights than the holders of another share class. Such a dual structure typically anchors the strength of a company's founders. After the IPO, Will Shu, the founder of Deliveroo, owns 6.3% of the company but 57.5% of the voting rights. This is common practice in the US, but not in the UK. As a result, Deliveroo was not eligible for inclusion in the FTSE 100.
Bottom Line
London hopes to niche itself as the technology and innovation capital of Europe, attracting fast-growing companies to the UK rather than the US
It is still early days in Deliveroo's history as a publicly traded company. Investors may well be willing to place their trust in ROO shares if management has a clear path to profitability and corporate governance issues are better addressed.
