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On Wednesday Deliveroo will be floating on the London Stock Exchange. They are the latest in a host of firms to provide a public offering – piggybacking on soaring investor confidence.
But, they have had to adjust to expectations. Only a week ago was the intended share price offering between £3.90 and £4.60 per share, the upper bound has since been trimmed to a more conservative £4.10, implying a potential market capitalisation of between £7.6-7.85bn. Deliveroo attributes this to “volatile” market conditions and insists on their intention of pricing shares “responsibly” to ensure “long term value”.
This narrower pricing comes in response to large domestic investment funds’ fears over regulatory problems. The Economist calls this move “radical” as it is the first-time western fund managers have been put off an IPO on such grounds. Whilst logical, it is likely to prevent the city from winning future hot tech listings.
The likes of Aviva, Aberdeen Standard and Legal & General are turning their noses up as a result of the current regulatory risk attached to the gig economy. A strike by Deliveroo riders on Sunday highlighted recent revelations that the firm was effectively paying some workers as little as £2 per hour. Elsewhere, Uber’s similar problems have underlined other potential shortcomings for this sector. Last month Britain’s Supreme Court ruled that Uber must recognise drivers as employees as opposed to being self-employed, casting doubt over the sustainability of their business model and confirming fears of a regulatory crackdown in the name of social protection for workers.
Despite gloomy fund managers, Deliveroo is still set to be valued similarly to Rolls-Royce, Britain’s flagship engineering firm. However, with vaccines proliferating and restaurants expected to open for the summer, short term prices could be expected to slump. This, coupled with a regulatory blow, perhaps in the form of a minimum wage for all delivery drivers, could be fatal.
Beyond current threats to the gig economy lies a deeper issue for Deliveroo. The costs associated with delivering food tend to rise roughly in line with revenue. Having recorded a £224m loss in 2020, something needs to change other than merely an increase in orders.
An expected rise of £1bn to an existing £380m cash pile will be focused on cutting costs. Reducing competition in a saturated market by way of acquisitions or mergers could provide an answer. The advent of ‘dark kitchens’, which allow restaurants to expand operations, specifically for Deliveroo, in external kitchens on cheaper land, so as to avoid high street rents, looks promising too.
It is possible too that Deliveroo’s CEO, Will Shu, and other existing stakeholders might be using this IPO as a chance to shift large portions of shares, and so the motivations for this public offering may be less growth orientated and instead more individually aimed. 2020 provided arguably the most favourable conditions for food delivery ever and yet huge losses were still incurred. Is this the time for management to take what they have and run?
A jump in share prices on Wednesday could benefit the city too. Having been persuaded to avoid New York and other stock exchanges, this decision to list domestically could be exactly what London needs to regain lost prowess. With its post-Brexit power slowly diminishing, surely a success story for one of the largest British listings in years will prove the financial hub’s standing, independent of Europe.
