Deliveroo’s IPO: rash or sensible?

Deliveroo's IPO

28th March 2021

Yahoo

Deliveroo targets a $10bn price tag in upcoming IPO 

 

This article discusses the imminent Deliveroo IPO and aims to uncover whether the decision for a public listing is too rash or if it is a sensible move by the firm to unlock important financing and improve their growth prospects. 

 

The Company

 

Deliveroo is an online food delivery service widely operating within the UK but that has expanded its network globally to over 10 other countries. Founded by William Shu in 2013, the company now has an expected valuation of $7bn after a large investment by Amazon in 2019. Deliveroo is not only involved in the delivery of food but is also responsible for its marketing, online order-taking and connecting restaurants to customers and vice versa.    The COVID-19 pandemic has led to a surge in the usage of food delivery services as Deliveroo seeks to compete with other prominent platforms such as Just Eat and UberEATS. Companies like Deliveroo have indeed been even more popular and heavily demanded than before, with Deliveroo seeing its gross transaction value (the total amount of transactions it processes on the platform) increase by 64.3% since 2019 (BBC News, 2021). 

 

Up till 2020, Deliveroo had not yet made a profit (Iqbal, 2021). It now claims that it is profitable in 11 of the 12 markets in which it operates (FT, 2020), which can be attributed to the support from Amazon. Indeed, the funding provided by Amazon would be used by Deliveroo to expand its reach to new customers, innovate, offer customers a customised experience (FT, 2020) and manage the impact of the COVID-19 pandemic on the businesses which they worked with.  

 

The Context 

 

Deliveroo has chosen to list on the London Stock Exchange over other competitors, reportedly due to the UK chancellor creating a new regime of stock market listings, making the LSE more attractive for founders wishing to take their companies public. The new rules for stock market listings allow some shareholders such as founders to be allocated shares which hold superior voting rights. Even after trading their shares publicly on the stock market, founders of Deliveroo would be able to retain more control of the company through the important shares they hold. 

 

This new listing will be very valuable to London and is expected to be its largest this year. Furthermore, being a British company, this decision displays Deliveroo’s commitment to the UK, especially for any further Deliveroo listings. 

 

In 2019, the £575m (FT, 2020) investment by Amazon prompted the Competition and Markets Authority (CMA), which investigates potential breaches of anti-competitive agreements, to investigate whether this would decrease competition. It was concluded that Deliveroo was a ‘failing firm’ which needed financial support. This decision sheds light on the instability of the company and raises the question of whether Deliveroo can sustain itself in the long-term. For this reason, the IPO seems to be a sensible step for the firm to begin to recover from its losses and focus on long-term prospects of growth. 

 

The emergence of online food delivery platforms has transformed the take-away market, which is experiencing fast growth due to its leisurely aspects and its convenience, amplified by the COVID-19 pandemic. With an approximated 11m users of online food delivery services in the UK, online deliveries have increased rapidly, with Just Eat dominating the market with around 67.3% of the market share in 2019. Although Deliveroo also has a strong presence within the UK, having the second largest market share of 21.3% after Just Eat, they are still unable to compete with the market leader (onefourzero, 2019).

 

 

Deliveroo's Market Share

Source: onefourzero

 

The IPO

 

Deliveroo seeks to increase its valuation through the IPO and is targeting a $10bn price tag. The intended use of the proceeds is for expansion as the company wishes to increase its network by reaching more locations globally and to be able to financially support all the restaurants that it works with (CMC, 2021). DoorDash, a US based food delivery platform with a similar business model to Deliveroo, listed on the NYSE in December 2020 and raised $3.4bn; Deliveroo also hopes to achieve successful results after its IPO. 

 

A private financing in Q1 valued the company at $7bn (FT, 2021) due to the upsurge in trading due to COVID-19, which looks promising for Deliveroo. The high potential for growth is evident in its expansion into online grocery delivery and its enthusiasm to expand its reach further. Deliveroo has seen an increase in its finances by $180m through its stakeholders, Fidelity and Durable Capital Partners, who are knowledgeable in the food delivery business. These two companies also have stakes in DoorDash, which saw share prices double after its IPO, adding some assurance for Deliveroo. 

 

In early discussions, it was reported that the IPO would only be open to institutional investors and the general public would have to wait to buy shares until trading on the LSE began (Evans, 2021). Reportedly, IPOs with the “highest level of institutional investment earn approximately 1% per month higher returns in the first year” and do not underperform (Lerner College, 2017). Furthermore, institutional investments are likely to attract more institutional investors in the future. However, the CEO has announced that Deliveroo customers have played a major role in the growth of the company and has therefore made £50m of shares available to any customer who had placed an order via the app. Each customer would be able to declare their interest for up to £1000 worth of shares.  Further details of the IPO are to be released throughout March. 

 

Predictions and Outlook

 

No official date for the IPO has been released. However, it is expected that there will soon be a statement by Deliveroo which will provide more information about the listing. Six investment banks are reportedly working on the flotation, including JP Morgan and Goldman Sachs. Further, the UK chancellor Rishi Sunak publicly commended Deliveroo’s decision for an IPO, as it would take its future growth to UK public markets. 

 

The decision for an IPO comes at a time where there is high stock market volatility, which is likely to affect the share prices offered to investors (FT, 2021) and could impact the target of a higher valuation for Deliveroo. It could be sensible for the company to bide its time until the stock market stabilises before going public, in order to achieve the greatest amount of funding. On the other hand, its US counterpart DoorDash only recently went public and saw its valuation soar. This evidently was a very successful IPO; one which Deliveroo would like to follow. DoorDash has been successful as it is designed to benefit both the users and the restaurants that it partners with (Sumagaysay, 2020). Deliveroo has a similar business model as it has always publicly shown a resolution to support the businesses that it works with. 

 

Although the markets are unstable, the IPO should go ahead. The company can raise finance at a crucial time where the pandemic has led to a surge in food delivery services and they can capitalise on this by attracting more customers and targeting growth potentials. Furthermore, the success of DoorDash has been attributed to a high demand for technology driven companies who have potential for fast growth (FT, 2020). It is very likely that investors will also see Deliveroo as a good investment and increase their chance of a successful IPO.    In 2019, Deliveroo made a loss of £319.9m and recovered only after being rescued by Amazon. The flotation would be the first step towards increasing its funding to mitigate the risk of further losses. Furthermore, the company’s longstanding institutional investors such as Bridgepoint, who invested $275m in 2016, would be provided with liquidity after the IPO (Sky News, 2021). 

 

If this IPO goes ahead, it will be one of the largest ones for the LSE for several years and if it is successful in raising approximately $3bn, it will provide Deliveroo with the finances to expand and become a serious competitor against Just Eat within the UK market. The IPO is also imperative for the company which has been unable to become highly profitable due to the losses it has been making and this could provide its investors with assurances and confidence.    It is unclear whether the surge in demand for food delivery services due to the pandemic has led to the recent profitability of the company. It is also unclear what the effect of the post-pandemic world may be, possibly representing a return to loss-making for Deliveroo. This further emphasises the need to unlock funding through listings and an IPO seems to be a sensible means to approach this, even though the present volatility in the stock market may be problematic. 

 

References

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