Will Deliveroo stumble on its stock market debut?
Roll up, roll up, to see a tech unicorn float. Deliveroo is going public.
Next Wednesday, the company makes its stock market entrance. Its advisers believe there is plenty of appetite from investors and value the company at up to £8.8 billion.
The London Stock Exchange has not seen anything like this since the initial public offering (IPO) for Glencore in 2011.
But, with days to go, a series of large fund managers have said they won’t be buying shares in Deliveroo because of concerns about governance and the way the company treats its riders.
"We are not comfortable investing in Deliveroo," Andrew Millington, Head of UK Equities at Aberdeen Standard told ITV News. "We’re concerned that Deliveroo’s reliance on the gig economy, on riders who aren’t employed by the business and don’t have the benefits and the protections that ordinary employment would give them is a real risk to the sustainability of the business model."
Deliveroo has 50,000 riders in the UK. The company classifies them as self-employed independent contractors and, as result, they don’t qualify for sick leave, holiday pay, pensions contributions or the guarantee of the minimum wage.Aberdeen Standard, which manages £457 billion of assets, believes Deliveroo will come under increasing pressure from government and from society more broadly to improve the working conditions of its riders."The cost of that for Deliveroo is, frankly, unknowable but it does call into question the sustainability of the business model that operates today," Millington told ITV News.
Last year, Deliveroo made a loss of £224m, despite a boom in takeaway deliveries during lockdown.
Aberdeen Standard is also unhappy that the IPO is structured in a way that means Deliveroo’s shareholders will have a limited say in the way the company is run.
The chief executive, Will Shu, will own just over 6% of the company but for the next three years he’s going to have more than 50% of the voting rights and will therefore hold the whip-hand in decision making.
"[The IPO structure is] really unusual for a UK company," says Milligan.
He added: "What that means is effectively, for the next three years, he [Will Shu] can do what he likes."
Other fund managers share Aberdeen Standard’s anxieties.
Legal and General Investment Management - the UK’s largest fund manager with £1.3 trillion of assets under management - said it is "unlikely to participate".
BMO Global Asset Management, which is based in Canada, says Deliveroo’s employment practices make the company "uninvestable".
On Wednesday, David Cumming, the chief investment officer for equites at Aviva Investors, which manages £334 billon of assets on behalf of savers, told the BBC he thought Deliveroo is too high risk.
The Local Authority Pension Fund Forum (LAPFF) - whose members collectively manage £300 billion of savings - also cast doubt on whether its members will invest.In at statement, Doug McMurdo, the chair, said: "This IPO raises a number of concerns on both the S and G of ESG (Environmental, Social and corporate Governance). As we’ve seen with Uber, and others, employment status and rights are a financially material question for gig economy companies. "LAPFF also opposes dual class share structures for tech companies as these greatly hamper our ability to hold boards accountable."
"Individual LAPFF member funds may either decide not to participate in the IPO, or their asset managers may give it a wide berth. There should be no expectation that local authority funds will automatically invest simply because it’s a big UK listing."
IPOs are unpredictable events and are delicately managed. For every ten successes there’s usually one that goes wrong or fails to perform.
The public criticism of Deliveroo’s employment practices by prominent investors is all very embarrassing but the company believes there is plenty of interest elsewhere.
It says that in the last four days it has received enough applications to be confident that there are enough buyers for all of the 384 million shares it plans to sell.
A spokesperson for Deliveroo said: "This proud British business looks forward to listing on the London Stock Exchange.
"Deliveroo has received very significant demand from institutions across the globe.
"The Roadshow began on Monday and the deal was covered by demand across the full price range by the end of the first morning.
"Demand has continued to build since then, including via our community offer, and we look forward to welcoming new shareholders next week alongside our currently highly respected existing investors.”
There is little danger of Deliveroo coming off its bike next week when it makes its stock market debut.
Goldman Sachs and JP Morgan have carefully assessed investor demand. Their advice was Deliveroo could get its shares away for as much as £4.60, with a lower limit of £3.90.But the company may be suffering the IPO equivalent of a slow puncture. Its shares will end up being sold towards the bottom end of the price range if the demand isn’t there.