AJ Bell predicts ‘bun fight’ for Deliveroo shares

Salford-based investment platform AJ Bell welcomed the news that Deliveroo has extended its initial public offering (IPO) to retail investors as “a step in the right direction.”

AJ Bell investment director Russ Mould said there is “likely to be a bun fight for the £50 million worth of customer shares in Deliveroo” at the IPO offer.

Mould said many investors may look past the fact that the company is loss making and operates in a highly competitive market.

And he said while “some people wouldn’t dream of putting money in a company associated with junk food” there will be others who see a big opportunity.

Deliveroo announced plans on Monday to launch its London listing after recording an increase in business during the COVID-19 pandemic — although it still posted a loss for 2020.

Deliveroo narrowed an underlying loss to £223.7 million from £317.3 million in 2019.

The IPO is expected to value loss-making Deliveroo at more than $7 billion.

“Today, Deliveroo is so much bigger than I ever would have thought possible,” said Deliveroo founder and chief executive Will Shu.

Deliveroo confirmed it plans to use a dual-class share structure that will give Shu more control over the company.

This means Deliveroo will have only a “standard” listing entry into the London Stock Exchange, rather than a premium one, excluding it from FTSE indices.

“It’s great to see Deliveroo extend its IPO to retail investors and not follow the typical route of restricting the shares to institutional investors like pension funds,” said Mould.

“AJ Bell has been campaigning for fairer access for retail investors at the IPO stage and this is a step in the right direction.

“However, it looks like interested parties must have ordered at least one item from Deliveroo to be able to register interest for the IPO and they will need to have downloaded the company’s app so it’s not a simple case of access for everyone with no strings attached.

“Someone hungry for Deliveroo shares probably won’t see that as a big a hurdle to jump through.

“But if there is big demand for the shares then it looks like the food ordering platform is going to give priority to its more regular customers.

“The idea that the more burgers you’ve ordered, the better the chance of getting shares in the IPO won’t go down well with investors who place high regard on ESG (environment, social and governance) issues.

“However, the mere fact the company is associated with fast food would mean such investors wouldn’t go near it anyway.

“Some people wouldn’t dream of putting money in a company associated with junk food, but there will be others who see a big opportunity.

“A year of various lockdowns has fuelled demand for companies like Deliveroo and there is an expectation that habits formed during the pandemic will remain long into the recovery.

“All this suggests there is likely to be a bun fight for the £50 million worth of customer shares in Deliveroo at the IPO offer.

“Investors may look past the fact that the company is loss making and operates in a highly competitive market.

“Instead, they will focus on big growth opportunities and potential for Deliveroo to play a key role in consolidating the market through mergers and acquisitions.

“There is also the fact that some investors will see it as an easy way to make a quick 10% to 20% gain, the level at which shares in newly listed companies often ‘pop’ on the first day of dealings.”

Mould added: “After the fanfare of how Deliveroo is going to reward drivers with bonuses and give customers a chance to buy the shares, here comes the hard facts.

“The most important point is how the company remains loss-making despite experiencing a surge in business going through its platform during the pandemic.

“It’s hard to see it’ll have another year when market factors were so much in its favour.

“Lockdowns kept people at home for months at a time and online grocery slots were hard to come by, so demand for takeaways shot up.

“A cynic might ask, if Deliveroo couldn’t deliver a profit against that backdrop, when will it?

“Fans of the business will point out that it has narrowed its losses by nearly 30% and that its underlying gross profit has shot up, both in absolute terms and as a percentage of the gross transaction value.

“That’s likely to be enough to fuel interest for many people in the shares when they come to the London market.

“But the fact remains that it is still loss-making once accounting for the costs of running the business.

“This goes to show that delivering food is not a quick win.

“It’s about building scale and there are several other firms running the same race.

“Deliveroo says it will continue to invest in its business which could impact profitability.

“It has no choice as rivals are doing the same.

“At some point down the line, it will have to start delivering that magic profit or investors will lose interest.”

About the Author

Mark McSherry
Dalriada Media LLC sites are edited by veteran news journalist Mark McSherry, a former staff editor and reporter with Reuters, Bloomberg and major newspapers including the South China Morning Post, London's Sunday Times and The Scotsman. McSherry's journalism has also appeared in The Washington Post, The Guardian, The Independent, The New York Times, London's Evening Standard and Forbes. McSherry is also a professor of journalism and communication arts in universities and colleges in New York City. Scottish-born McSherry has an MBA from the University of Edinburgh and a Certificate in Global Affairs from New York University.