Food Delivery startup Deliveroo cut the upper valuation target in its upcoming April 4 London initial public offering (IPO) after some institutional investors expressed reservations at the company’s treatment of riders.
“The offer price has been set at £3.90 per Share, equating to a market capitalization at admission of £7.59 bn ($10.45 bn) (excluding any over-allotment shares),” Deliveroo informed AMEinfo in an email.
On the first day of trading, shares closed 14% lower at £2.84 per share, having fallen 30% initially.
The company had initially hoped for a share price of up to £4.6.
Will Shu, Founder and CEO of Deliveroo, said: “I am very proud that Deliveroo is going public in London – our home. 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, bring customers more choice than ever before, and provide riders with more work.”
Deliveroo had set an original IPO price range of £3.90 ($5.37) to £4.60 ($6.34) per share, implying a market cap of $12.2 bn.
That aside, the company had a robust performance in 2020.
Ready to float
Deliveroo works with over 115,000 restaurants, takeaways, and grocery stores globally and provides work to over 100,000 riders across 800 locations across 12 markets.
It revealed a strong financial and operating performance for 2020 ahead of its intended listing on the London Stock Exchange.
Over the course of the year, the company grew gross transaction value (GTV), the total amount of transactions it processes on its platform, by 64%, from £2.5 bn ($3.44 bn) in 2019 to £4.1bn ($5.65 bn).
Strong GTV growth was driven by an increase in monthly active customers as well as greater engagement and spend from its existing consumer base of more than 6 million monthly consumers even as markets opened up for dine-in following lockdown removals.
Despite this significant growth, online food delivery is still at an early stage, presenting enormous growth potential. The restaurant and grocery sectors represent an addressable market of £1.2 trillion ($1.65 trn) in Deliveroo’s 12 markets, of which just 3% of sales are estimated to be online – equivalent to less than 1 out of the 21 weekly meal occasions.
Underlying gross profit was up 89.5% to £358 million ($493 mn) from £189 mn ($260 mn) the previous year.
Deliveroo narrowed losses for the year to £223.7 mn ($308 mn) compared to £317 mn ($436 mn) in 2019.
Deliveroo will invest to further develop its innovative growth businesses, mainly Editions delivery-only kitchens; Signature, enabling restaurants to offer delivery via their own online channels; Plus subscription service, removing delivery fees for a flat monthly charge; and on-demand grocery.
Deliveroo said that legal challenges over workers’ rights could affect their ability to continue operating in certain regions, including the UK.
It admitted that its business model relies on employing riders as “self-employed contractors” in the investment prospectus.
Referring to existing legal challenges over workers’ rights in Italy, Australia, Spain, and the Netherlands, the company said:
“If we were required to make changes to the basis on which we engage riders across a number of our markets, or in our key markets, this could affect our ability to continue operating in those markets or require material changes to our model.”
This is an admission to investors that the shares they are buying could be compromised by Deliveroo potentially having to give its riders employment protections instead of gig contracts.
UK’s Supreme Court recently ruled that rideshare company Uber has to classify its riders as workers, paying a minimum wage, pension, and holiday.
This has bought renewed attention to the means by which Deliveroo and Uber achieve strong valuations by eliminating minimum wages, pensions, and holiday pay from their balance sheet.
One U.K. fund, Aviva, has said that lack of workers’ rights is the investment risk residing at the heart of Deliveroo’s valuation.
Investment forecasters recently said that the Uber ruling “dampened the mood” around Deliveroo’s IPO with one describing it as “an existential threat to Deliveroo.”
More threats around valuation
Deliveroo, backed by Amazon, had set a price range for its planned London listing with an upward valuation of $12 bn, posing a test for continued investor appetite in online food-delivery services.
As vaccinations increase in many countries, including the U.S. and Deliveroo’s home market of the UK, it is unclear how sustainable delivery growth will be if people start to flock back to restaurants.