Deliveroo has announced it will be floating in London, in preference to the alternatives of New York or Amsterdam. Deliveroo made the decision after the latest budget endorsed proposed rules for loosening listing rules in the UK. These include measures that would allow founders to keep more control after going public, which is considered essential by many successful tech start ups.
We have seen this, for example, with Facebook where investors have become frustrated with the level of control still exercised by founder Mark Zuckerberg. It was seen as an obstacle to having more tech start ups on the London exchange.
Is Deliveroo asking the market for too much?
While the listing will be a much-needed shot in the arm for the City of London, there are some concerns of the valuation of the stock. Deliveroo is understood to be aiming for a valuation of $10bn. This follows a private financing that valued the business at $7bn. This is more than double the Amazon-led investment of 2019.
“This valuation of Deliveroo seems excessive for a business which is still many years from profit, especially given that some hold significant doubt whether the home takeaway delivery model can become profitable outside of London,” said Professor John Colley, Associate Dean of Warwick Business School. “Indeed, the sole basis for this valuation appears to be the immense amounts of cash looking for growth technology stocks. Bear in mind the recent Supreme Court finding that Uber drivers are ‘workers’ and have certain rights such as paid holidays and pensions. This finding may well apply to takeaway home delivery too, driving up their costs.”
Ultimately Deliveroo will have to charge customers and restaurants far more to make a profit, but that brings its own difficulties. For restaurants, margins are already narrow. And at what price do customers simply decide to collect their own meals?
Potential investors should also remember that if this listing is under new stock market rules, it may well be accompanied by founder share rights. That means if the company is badly run there is little shareholders can do to change the board.
Investors should take note of the success of DoorDash (NYSE:DASH) in the US: the company was valued at $16bn six months ahead of its IPO, then went public at $32bn and now has a market cap of $47bn (it was higher but has seen a considerable drop in its share price since mid-February).
Timing is going to be everything for this one
Deliveroo is thought to be gunning for an IPO in April, but time is of the essence here: sentiment looks like it may be leaving tech stocks. DoorDash is now getting close to its 52 week low of $135. Has Deliveroo left it too late to get out of the gates?
The timing is also noteworthy since it comes a day after the Hill review. Deliveroo won’t be eligible for a premium listing – and the inclusion on FTSE indices that goes with it – but it soon will be.
The review, which the Chancellor Rishi Sunak endorsed in the Budget, calls for companies with dual class share structures to be able list in the premium listing segment, with some caveats to help protect investors, e.g. the dual class structure would be permitted for a maximum of five years and voting rights would be capped at a ratio of 20:1. It will also see the free float requirement lowered to 15% of available shares from the current 25%, and it will create a much easier regime for SPACs – blank cheque companies that are created with the aim of acquiring another business.
As Hill says, “listing on the premium listing segment of the FCA’s Official List has historically been globally recognised as a mark of quality for companies”, which begs the question of the merits of ‘watering down’ ‘the rules.
But the principle of evolving the listings rules for today’s markets, today’s technology, today’s investors, and the reality of Brexit, do make sense.