Update: It seems that the market is volatile indeed. After pricing its shares at the lower end of the range, Deliveroo, trading as “ROO” on the London Stock Exchange, opened at 331 pence (£3.31), down some 15% on its private placement pricing, and it has been continuing to decline throughout the day. It finally closed at 287.45 pence — down 43.55% on its opening price of 331 pence after trading in a range between 271 pence and 344.95 pence has fallen short of the debut price, too. Some are claiming that the poor debut is due in part to public pressure over its labor practices, which we detail below. We'll continue to update this story with pricing. Original post below.
Tech stocks continue to deliver on the public markets, figuratively and literally: Deliveroo, the UK food-delivery giant backed by Amazon that has seen a surge of business during the Covid-19 pandemic, has announced pricing of £3.90 ($5.36) for its shares when goes public on the London Stock Exchange later today, valuing it with a market cap of £7.59 billion ($10.4 billion), and raising £1.50 billion ($2.1 billion).
The figure is at the lower end of the reduced range Deliveroo set earlier in the week of £3.90-£4.10. At the time, Deliveroo said the “volatile global market conditions for IPOs” led it to narrow the range from its original £3.90-£4.60. “Deliveroo is choosing to price responsibly within the initial range and at an entry point that maximises long-term value for our new institutional and retail investors,” the company said.
However, separately, Deliveroo has been facing persistent controversy over how it pays its drivers, a story that doesn't look like it will go away too soon. Deliveroo sources have repeatedly claimed that negative stories arising out of these labor issues have not been impacting the company in the lead-up to the IPO, although some have been detailing the large institutional investors that have refused to participate in the offering. Activity today on the market could be one indication of what the real impact has been.
The listing today is a milestone not just for the company but for the London stock market in general. At a time when a number of scaled up privately-held tech companies have, and are exercising, a lot of options — acquisitions to bigger rivals, listing in the U.S. market, pursuing a SPAC — it's notable that Deliveroo has opted for the LSE. It's the biggest IPO on the exchange in terms of market cap in nine years (when commodity giant Glencore listed in 2011), and the biggest in terms of money raised since last September (when e-commerce company The Hut Group listed).
“I am very proud that Deliveroo is going public in London – our home,” said Will Shu, Deliveroo's CEO and co-founder. “As we reach this milestone I want to thank everyone who has helped to build Deliveroo into the company it is today — in particular our restaurants and grocers, riders and customers. In this next phase of our journey as a public company we will continue to invest in the innovations that help restaurants and grocers to grow their businesses, to bring customers more choice than ever before, and to provide riders with more work. Our aim is to build the definitive online food company and we're very excited about the future ahead.” As with the U.S. exchanges, tech companies are fueling a lot of the action on the LSE at the moment, with four out of the last five IPOs valued at over £1.5 billion in the last five years coming from tech companies.
Regardless of how Deliveroo fares today, the labor controversy facing the company in its main market is one that will continue to play out. A report from the Bureau of Investigative Journalism in the UK found that one in three Deliveroo couriers made less than £8.72, which is the UK national minimum wage for those over 25. In some cases, the disparity of earnings was especially stark: a cyclist in Yorkshire worked 180 hours and was paid the equivalent of £2 per hour, it found. Deliveroo has typically said that its couriers are paid more than £10 an hour on average.
One reason that the story might continue to persist is because it's about more than just Deliveroo. Earlier this month, Uber reclassified 70,000 drivers in the UK as workers to give them benefits as the result of losing a court case, although Uber Eats — a rival to Deliveroo — was not included in the deal. However, it may not be legal but public pressure that will shift what happens with food delivery drivers. Just Eat, another competitor in the space, last year kicked off an agency worker model that gives drivers the option to work instead under an hourly wage rather than per ride. That becomes, in turn, one possible outcome for how to resolve the situation.
Whether or not investors have an opinion on this matter, it may not be that the so-called “investors revolt” is directly related to a sense of justice for low-paid delivery people, as it is the threat of legal action, losing court cases, and generally finding more costs on the bottom line than originally anticipated in the company's unit economics.
Those unit economics are indeed a focus for investors, who may be bullish on the basic idea even as disputes over how to run it as an equitable business continue. Going into the IPO, Deliveroo is not profitable, but its loss had been narrowing on a huge surge of sales during the Covid-19 pandemic, not least because many restaurants have been forced to shut down their dine-in businesses and so consumers are turning to services like this to get their fixes of pre-prepared sushi, pizza, jerk chicken and burritos.
Tom Powdrill, head of stewardship at Pensions & Investment Research Consultants, an independent body providing services to pension fund investors, has been one of the more outspoken on how labor practices might play out for investors. In a blog post published today, he points out that issues such as the company's dual-class structure, which gives less influence to asset managers, has played a part, but so has this ongoing labor issue:
“Reasons for ducking the Deliveroo IPO are varied,” he writes. “Partly it’s a simple question of how successful the business is likely to be. It’s also being shunned due to its treatment of riders who are generally employed on a gig-basis leaving them unentitled to basic benefits. This has two aspects to it. On the one hand some investors may find the employment model too much on its own terms. But it’s also a risk. If Deliveroo is successfully legally challenged on employment status the economics change too, as we saw recently with Uber.”
Post updated with trading price.