App-based takeaway delivery service Deliveroo has kicked of proceedings for an IPO that will see it list on the London Stock Exchange. The loss-making business is expected to pursue a public valuation of over $7 billion.
The decision to opt for London in favour of Wall Street could be considered as an immediate validate of chancellor Rishi Sunk throwing his weight behind recommendation for premium listings rules to be relaxed for high growth technology and life sciences companies. It is hoped allowing founders to retain a ‘golden vote’ and reducing the minimum amount of equity being made public from 25% to 15% will give London a competitive edge over rival exchanges in New York, Amsterdam, and Asia.
The recommendations were made as part of a review led by Lord Hill of Oareford and requested by the Chancellor. Implementing changes based on the recommendations will take some time but the general shift in attitude is believed to have influenced Deliveroo’s decision on London. The company is 8 years old, having been founded in 2013 by Will Shu and Greg Orlowski. Deliveroo now has around 100,000 riders, noticeable for their distinctive bright backpacks full of food orders from the 115,000 partner restaurants across 12 countries the company works with.
Deliveroo was most recently valued at $4 billion when it raised $575 million in May 2019. Amazon led that round, which was only cleared by the competition watchdog last year. Another $180 in fresh capital was raised again the January from existing shareholders. That round valued it at over $7 billion and the IPO would hope to at least match that total.
Dual-class listing of shares, one of Lord Hill’s recommendations is controversial as it allows those with a higher class of shares, usually founders or early investors, to overrule ordinary shareholders, even if left with a relatively small minority. ‘Golden’ shares come with multiple votes. Deliveroo said it does plan to issue dual class shares but that the dual structure would be limited to lasting for a maximum of 3 years.
Lord Hill commented on his review and Deliveroo’s rapid reaction to its recommendations:
“One of the whole points of our listing review was to encourage more of the growth companies of the future to list in London. The changes we recommended would make it easier for more companies to follow Deliveroo’s lead.”
Interest in a Deliveroo IPO is expected to be high, despite the fact the company is loss-making. In fact, not only does the company run at a loss, but its less than a year since it told the Competition and Markets Authority it would go under with a $500 million investment from Amazon.
But a year of lockdown boosting demand for Deliveroo’s services and the investment being given the green light and the company has turned things around dramatically. A Premier Foods report showed monthly deliveries from restaurants have grown by almost 350% on pre-lockdown levels last year.
While demand would be expected to drop off once lockdown ends and we move into a post-pandemic world, the report also found that 75% of users of food delivery apps plan to continue to use them. With 57% of the adult population in the Deliveroo’s markets yet to use their or a competitor service, there is still also plenty of room for growth.
Despite losses, the threat of changes to employment law increasing gig economy overheads and uncertainties how the end of lockdown will hit demand for food deliveries, investors have demonstrated a big appetite for business models like Deliveroo’s.
Just Eat, which has the alternative business model of operating a marketplace model rather than delivering the food itself, floated at a huge multiple of 104 times underlying earnings in 2014 and there was no shortage of interest. The group, which has since merged with Takeaway.com, is now worth $12 billion. DoorDash, a US peer of Deliveroo saw its share price soar by 86% on its first day of trading on Wall Street last year. That took its valuation to $59 million – a fourfold increase on its last private valuation of $15 billion set just months earlier when it raised capital in June.
Unless interest in Deliveroo deviates substantively from those listings, an initially expensive-looking $7 billion valuation should be comfortably achievable.
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