Deliveroo flotation not looking as much of a coup for London as it did

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More fund management firms are going public with their lack of enthusiasm for the initial public offering (IPO) of food delivery outfit Deliveroo.

Legal & General Investment Management (LGIM) and M&G have joined Aviva Investors, Aberdeen Standard, BMO Global and CCLA in announcing they have misgivings about the company’s business model.

READ Deliveroo flotation has many strikes against it

“BMO GAM will not be participating in the Deliveroo IPO, due to concerns over the company’s sustainable competitive advantage. Deliveroo faces significant pressure from the market leader, Just Eat Takeaway, which is investing heavily to improve its restaurant coverage and delivery proposition, through an ‘employed rider’ model,” said Philip Webster, director of Global Equities at BMO Global Asset Management.

“We also see headwinds to Deliveroo’s revenue growth as we exit lockdown and customers return to dining out in restaurants. These revenue risks are further compounded by the issues around workers’ rights and a potential regulatory change, which would hamper its path to profitability.

“At BMO GAM, ESG is integrated into our investment process and is a fundamental part of our due diligence before we invest our clients’ capital,” Webster added.

The decision by Deliveroo to float in London was regarded as a feather in the cap of a London stock market reeling from the news that Amsterdam was in danger of stealing its crown as Europe’s premier stock market but is now turning into a bit of an embarrassment.

The technology company is set to take advantage of controversial new proposals to relax restrictions on dual-class shares, which typically are designed to ensure the founders of a company can more easily maintain control of their “baby”.

The UK’s distaste for dual-class shares was in danger of leading to London missing out on sexy and highly profitable initial public offerings by technology companies but a review of London’s listing rules, led by Lord Jonathan Hill, the former European Union commissioner, came out in favour of relaxing the restriction.

The recommendation is seen as not only a lure to technology companies considering a listing in London but as an incentive for special-purpose acquisition companies (SPACs) – also known as “blank cheque investment vehicles” – to list in the UK capital.

However, LGIM has raised concerns over the company’s “unequal voting structure”.

“It is important to protect minority and end-investors against potential poor management behaviour, that could lead to value destruction and avoidable investor loss.,” the fund management firm was quoted as saying.

The Deliveroo flotation is relatively unusual in that retail investors are being invited to buy a slice of the shares.

According to Danni Hewson, a financial analyst at AJ Bell, there have been more than 60 IPOs since the start of 2020 but only a handful have been open to retail investors.

“This is particularly galling as those primary listings often bring about a ‘first-day pop’, an immediate increase in value,” she said.

“Analysing all the London IPOs from the start of 2018 to today you’ll find the average “pop” on the first day of dealing was 12%, a tasty return that’s been mostly denied to retail investors. Many believe that initial increase in value can be artificially baked in, giving institutional investors an unfair advantage when it comes to making profit. Companies listing for the first time want the buy-in and it’s thought shares can be discounted by as much as 20% to fan the flames of attraction,” Hewson said.

The shares may well have been priced to fly on the first day of dealings but it is possible Deliveroo’s investment bank advisors, Goldman Sachs and JP Morgan (who know a thing or two about dealing with adverse publicity over abusive working practices) did not factor in the current hoo-hah.

Whether the adverse publicity will deter Joe Public (and his brother Sid) from investing in Deliveroo is open to question.

“As some lockdown winners found themselves with unusual amounts of spare cash the number of retail investors has shot up over the last twelve months. Technology has also made markets more accessible,” Hewson noted.

“Would-be investors should make sure it’s not just Deliveroo’s menus they’ve perused before parting with their cash, but at least they’ll get the chance to make that choice,” she concluded.

 

— adds comments from BMO GAM —

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