The truth of Deliveroo’s $11b IPO

The investment giants kicking up a stink about Deliveroo Holdings Plc, the hot startup that is preparing to list in London next week, are only half right.
Legal & General Investment Management, Aberdeen Standard Investments and Aviva Investors are among the asset managers who have said they don’t plan to invest in the initial public offering, which will see the food-delivery company valued at about 8 billion pounds ($11 billion) as it sells some 1.6 billion pounds of stock. The objections focus on two factors: that the dual-class share structure gives Chief Executive Officer Will Shu too much power, and that the company’s gig-based employment model is unethical and poses an investment risk.
Their worries about the first part are misplaced, but they’re right to agonize over the second.
In the US, it’s pretty normal for companies to be controlled by founders through special shares that give them a majority of the voting rights even though they only actually own a minority stake. That’s not the case in the UK, where listed companies with such multiple classes of stock are ineligible for inclusion on indexes such as the FTSE 100.
As a consequence, top startups such as Farfetch Ltd and Spotify Technology SA have taken their IPOs to New York rather than London. In response, the UK presented nuanced new proposals earlier this month that would allow dual classes of stock for the first three years after a listing. That’s a good idea: It lets startups raise money from public markets, while giving founder CEOs time to prioritize growth and protecting them against unwanted takeover approaches from more highly valued US rivals. In a shrewd piece of political choreography, Deliveroo’s announcement of its plan to list in London came just a day after UK Chancellor of the Exchequer Rishi Sunak endorsed the proposals.
It’s shortsighted of the likes of LGIM, the UK’s biggest asset manager, to object to the dual-class model. The S&P 500 has averaged annual returns of 14% over the past decade, assuming dividends are reinvested, while the FTSE 100 has returned just 5.2%. The difficulty with a purist view on stock classes is that if tech founders go elsewhere, then funds with a UK focus risk being stuck with a pile of low-growth, old economy investments.
The concerns about the gig economy, however, are warranted. A third of Deliveroo drivers surveyed by the Bureau of Investigative Journalism make less than the UK minimum wage. The country’s Supreme Court ruled in February that drivers for Uber Technologies Inc should be classified as workers, entitling them to rights like the minimum wage, holiday pay and rest breaks. Deliveroo too seems set to face similar legal fights in the years to come. Indeed, an Italian decision along those lines last year contributed to the London-based company having to set aside 78 million pounds ($107 million) to cover the backdated costs. That number will be a lot bigger if the move is echoed in the UK, its biggest market, or even in France, Spain and Australia.
Deliveroo can get ahead of regulatory issues by pledging to provide deliverers with the relevant protections. Yes, it would increase costs. But if the business can’t stomach costs that regulation may impose anyway, then it’s not robust enough to warrant the asset managers’ investment. And if it is, then it will enjoy a significantly higher valuation multiple as those funds invest.
At the high end of the IPO’s current price range, Deliveroo will be valued at 7.4 times last year’s revenue. That’s a significant discount to the 15 times multiple enjoyed by US peer DoorDash Inc, but more generous than European rival Just Eat Takeaway.com NV’s 5.7 times multiple.
—Bloomberg