Two of Britain’s biggest investors will refuse to buy shares in Deliveroo when it launches on the stock market next month because of concerns about how they treat staff.
The UK’s third most popular takeaway delivery service, behind UberEats and Just Eats, hopes to be valued at up to £8.8billion when it lists its shares in April.
Deliveroo is allowing anyone to apply to buy shares in multiples of £250 in a deal that is expected to make the company’s founder Will Shu, 41, who was also its first delivery rider, approaching £500million.
But investment giants Aberdeen Standard and Aviva, who have combined portfolios of more than £800billion combined, say they will not be backing the biggest float on the stock market for a decade.
Yet for all the excitement about Deliveroo, the fact remains that the company has yet to turn a profit — even during lockdown. But that hasn’t stopped private money from pouring in, however, with the company raising more than £1billion in recent years.
Andrew Millington, head of UK Equities at Aberdeen Standard, told the BBC’s Today programme that the conditions for Deliveroo staff is considered a ‘red flag’, adding: ‘We wouldn’t be comfortable that the way in which its workforce is employed is sustainable.’
Graft: Deliveroo founder Will Shu worked as the company’s first delivery driver to ensure he knew exactly what people wanted from his company – and is set to make millions from the float
Aviva and Aberdeen Standard, two of the UK’s biggest asset managers, said it would not be buying Deliveroo shares because the firm does not pay riders the minimum wage or offer holiday and sick leave
He said they had recently sold off shared in Boohoo after it emerged their suppliers were using sweatshops in Leicester during lockdown.
The banker set to make £500M from getting on his bike: How Deliveroo founder was so fed-up with late-night Tesco meals he launched delivery firm
The Deliveroo launch on the London Stock Exchange is set to make its geeky founder Will Shu as much as £430million.
His idea was born while he worked for JP Morgan in Canary Wharf.
The food obsessed 41-year-old said he wandered around the financial district at night during long shifts wanting restaurant food, but always ended up going to Tesco, the only thing left open.
He then started the business with a tech friend, who helped him build the app in 2013, and they set up in a ‘death trap’ office in Marylebone shared with a company called ISIS and cable channel Gem TV (pictured).
The laid back and shy businessman was also known for his scruffy clothes.
One colleague said: ‘He may have been the only founder who pitched us wearing shorts.
‘He wore shorts for the first four years I worked with him, regardless of the weather or the occasion.’
Another said: ‘I’ve seen him do every job in the company – from being a rider to doing customer service to signing up restaurants.
“His job is incredibly intense and he obsesses over it, but he’s always down to earth and has a laugh’.
Will was the company’s first rider – and seven years on the American, born Taiwanese parents, who moved to the UK 16 years ago, is now one of the UK’s top tech bosses.
Deliveroo will sell around £1bn of new shares next week.
Mr Shu, and his family who also backed it at the beginning, could now be worth £550m.
David Cumming, chief investment officer at Aviva, told the Today programme that social responsibilities are now taken ‘a lot more seriously’ by investors.
He said: ‘A lot of employers could make a massive difference to workers’ lives if they guaranteed working hours or a living wage, and how companies behave is becoming more important.’
The float will bag founder Will Shu a windfall of as much as £430m for his 6.2pc stake, while other staff members with stock options are also expected to become millionaires overnight.
Among them is executive Thea Rogers, the girlfriend of former chancellor George Osborne, whose stake is reported to be worth £40m – although Deliveroo has denied it is that much.
Deliveroo says its business model gives riders ‘freedom’ to choose their hours, but that also means that they are self-employed and not entitled to the minimum wage from the company, or holiday and sick pay.
The business, one of many using this model, is facing court action from staff, which could change the rights of staff.
Last week Uber announced its UK drivers would become its first globally to be paid both a minimum wage and holiday pay.
Uber will also offer drivers paid holiday time and enrol them into a pension plan as they become classified as workers, not independent contractors. The announcement followed a ruling by the Supreme Court last month that Uber drivers were entitled to the benefits.
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 £9billion.
Its debut will be a big moment for the London Stock Exchange, which has been starved of tech talent in recent years.
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.
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.
Andrew Millington for Aberdeen Standard and David Cumming from Aviva have confirmed they will not be investing because of ‘red flags’ over workers’ rights
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.
How will the Deliveroo share launch work?
Under the proposed listing, Deliveroo’s shares will have two classes.
Shu will have so-called Class B shares that carry 20 votes per share versus the one each carried by normal Class A shares.
But the company has said that dual structure – used by many tech firms in the US to preserve the control of their founders – will only be in place for three years.
The float was announced just days after the Government committed to changing the current rules in the favour of founders.
Documents published for the upcoming float reveal that Deliveroo has also set aside more than £112m to cover potential legal costs relating to the employment status of its riders.
Deliveroo works with 100,000 delivery riders across the world, who it argues are self-employed contractors rather than employees who would receive benefits such as holiday pay.
Earlier this month, the firm posted losses of £223.7m for 2020, despite surging sales amid lockdown restrictions.
The company said it saw transactions rocket by 64pc to £4.1bn in 2020 as the pandemic helped to spark increased takeaway demand.
It said that more than six million people order through the 115,000 restaurants, cafes and stores on its platform each month.
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.
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 80pc 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 pc within months of listing.
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.
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.
In demand: Deliveroo said the value of orders it received was up 121% in January and February – but it has never made a profit
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.