The FTSE is poised for its biggest company float in a decade next week, as Deliveroo joins the stock exchange.
Depending on the final share price, the restaurant takeaway delivery giant could be valued at as much as £9 billion.
Its debut will be a big moment for the London Stock Exchange, which has been starved of tech talent in recent years.
Landmark float: Depending on the final share price, the restaurant takeaway delivery giant Deliveroo could be valued at as much as £9 billion
It will mean a significant windfall, too, for the company’s founder, Will Shu, a 41-year-old London-based American former banker.
He worked as Deliveroo’s first delivery driver to ensure he knew exactly what people wanted from his company, and now stands to make more than £300 million when it goes public.
Meanwhile, his friends and family who invested in Deliveroo in 2013 could make a 60,000 per cent return.
Yet for all the excitement about Deliveroo, the fact remains that the company has yet to turn a profit – even during lockdown.
That hasn’t stopped private money from pouring in, however, with the company raising more than £1 billion in recent years.
But should retail investors follow the big money in betting on Deliveroo? And what do you need to know first?
Here’s your guide to help you decide whether you should jump on this two-wheeled tech bandwagon…
Graft: Deliveroo founder Will Shu worked as the company’s first delivery driver to ensure he knew exactly what people wanted from his company
Growing appetite for ordering in
As one of the best-known takeaway apps in Britain, Deliveroo has thrived throughout the pandemic.
It will be hoping our growing appetite for restaurant takeaway will hold up – even when we can finally dine out again.
Even so, some analysts have raised their eyebrows at the sky-high valuation.
‘The expected share price is very much towards the upper end of expectations,’ says Susannah Streeter, a senior analyst with investment platform Hargreaves Lansdown.
She points out that in January, during the company’s most recent fundraising round, its valuation was estimated at £5 billion.
Last month, Deliveroo reported a doubling of sales based on figures from a year ago, but is that enough to justify such a boost?
As is often the case for so-called ‘growth’ stocks, investors are essentially betting that the company’s market share will continue to expand. This has certainly been the pattern to date, as Deliveroo has expanded to 11 other countries throughout Europe and Asia.
But the lockdown winner faces stiff competition, both at home and abroad. On home turf, it must hold its own against U.S.-owned Uber Eats and global market-leader Just Eat.
Further afield, its competitors include European offering Delivery Hero, China’s Meituan Waimai and even Amazon’s rapidly evolving food services.
Meanwhile, Deliveroo’s IPO (Initial Public Offering) comes during a period of soul-searching for the gig economy.
Like many similar companies, Deliveroo operates an ultra-flexible model through which self-employed workers are paid per drop-off, rather than for the time they are actually available to work.
Whatever the merits of this model, there’s no doubt that it’s coming under increased scrutiny.
Just last month, the UK Supreme Court issued a landmark ruling that Uber’s taxi-drivers should be classed as ‘workers’, with entitlement to minimum wage and holiday pay.
And although this doesn’t affect Deliveroo (or Uber Eats), things may change in the future -and quickly.
‘If Deliveroo is forced to change the way it classifies its riders in the future, this is likely to puncture its profits prospects,’ says Ms Streeter.
Deliveroo will be hoping our growing appetite for restaurant takeaway will hold up – even when we can finally dine out again
No guarantee of success
Debates over its value aside, there is at least one area in which Deliveroo represents good news for retail investors.
Unlike with many IPOs, its founder has ensured ordinary investors are given the chance to purchase pre-market shares.
Existing customers have been invited to express their interest in the IPO through the Deliveroo app. They can then look to buy shares worth thousands of pounds at a price likely to be between £3.90 and £4.60 each.
Of course, anyone looking to invest in Deliveroo – either through the IPO or when it joins the markets – needs to do their homework. It’s worth bearing in mind that an IPO isn’t a guaranteed golden ticket to profit.
Shares in Aston Martin Lagonda have famously fallen 80 per cent since the firm joined the London Stock Exchange in 2018.
Meanwhile, early investors in Uber (which listed in New York in 2019) had to wait 18 months to make a profit, after the value of its shares dropped 30 per cent within months of listing.
‘Unicorn’ boost for FTSE future
Another way retail investors can look to profit from successful companies such as Deliveroo is through investment funds.
Unlike some private companies, Deliveroo hasn’t sold shares to mainstream investment companies to raise money — meaning that you won’t find it in any retail funds just yet.
The company may make an appearance in UK or globally focused value funds before long, though, particularly if its shares perform well.
But what does the IPO mean for the wider FTSE?
Deliveroo’s size would ordinarily be enough for the company to join the FTSE 100. However, the company’s slightly complex legal structure means that Deliveroo will be excluded from the index.
Like many technology companies, it is opting for ‘dual-class’ shares, which means that later investors will have fewer voting rights.
This is perfectly above board, but it does prohibit companies from joining the FTSE 100 or 250.
This may well change in future — a Government-backed review has recently called for this. But for now it means that investors holding tracker funds won’t benefit from Deliveroo’s inclusion.
Even so, the arrival of a true British ‘unicorn’ – a privately held start-up so successful it’s like a mythical beast – bodes well for the FTSE’s future, even if not all investors feel the benefit just yet.
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