Deliveroo lowers price of controversial IPO despite significant demand

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Deliveroo has narrowed the price of its upcoming IPO despite investor demand outstripping the full deal size, citing market volatility.

The food delivery service previously said shares would be offered at £3.90-4.60 a pop, pushing the market capitalisation to up to £8.9bn.

READ: Deliveroo flotation has many strikes against it

However, shares will now go for £3.90-4.10, valuing the tech unicorn at £7.6-7.85bn once it joins the London Stock Exchange this week.

Deliveroo has received very significant demand from institutions across the globe,” the firm was reported as saying by the FT.

“The deal is covered multiple times throughout the range, led by three highly respected anchor investors. Given volatile global market conditions for IPOs, Deliveroo is choosing to price responsibly within the initial range and at an entry point that maximises long-term value for our new institutional and retail investors.”

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, noted that the move may be due to Deliveroo trying to secure a successful flotation.

‘’By narrowing its target range, Deliveroo is trying to make sure it doesn’t hit a bump in the road as it begins its journey on the stock market. It’s likely initial orders for the IPO have come in nearer the bottom of the target range, and by setting its sights nearer those prices, it is managing expectations on its ride to listed status,” she noted.

ESG on the menu

The loss-making company has been under fire for governance issues, with an investigation by The Bureau Local revealing that many workers were paid well below the legal minimum wage.

One #Deliveroo rider in our sample was logged in to the app for 180 hours and was paid the equivalent of £2 per hour. #TakenForARide

— The Bureau Local (@bureaulocal) March 25, 2021

Some of the UK’s largest investment firms including Aviva, BMO Global, CCLA, Aberdeen Standard, Hargreaves Lansdown, Rathbones and Legal & General all said they would not invest in the company for ethical reasons.

“As long-term investors, we’re looking to invest in businesses that aren’t just profitable but are sustainable. Employee rights and employee engagement are an important part of that,” said Andrew Millington, the head of UK Equities at Aberdeen Standard, part of Standard Life Aberdeen PLC (LON:SLA), last week.

“We will not be taking part in the Deliveroo IPO as we are concerned about the sustainability of the business model, including but not limited to its employment practices, and also the broader governance of the business.”

The sentiment was echoed by Ketan Patel, fund manager of the EdenTree Sustainable and Responsible UK Equity fund at EdenTree Investment Management Limited, who said Deliveroo is “the antithesis of a sustainable business model”.

“For those investors who argue that only change can be brought by investing and engaging with management, we would urge caution as this approach has yielded little or no progress in businesses that are built around exploitative practices,” he said.

“To amend or remove these practices will leave a highly unprofitable business model and one that will not appeal to any investor. From an investment perspective, the threat of regulatory change remains the biggest issue for long-term investors and Uber is a real example of how fast the regulatory landscape can change, rendering the business model null and void.”

On Sunday, the Independent Workers’ Union of Great Britain (IWGB), alongside ShareAction and The Private Equity Stakeholder Project, released a full investor briefing outlining what they deem financial and reputational risks associated with buying Deliveroo shares.

The IWGB also called riders to go on strike on April 7, although Deliveroo said it doesn’t represent the majority of its workers, according to Reuters.

It also noted that MPs from all parties have been backing its demands, with an Early Day Motion supporting the union’s #ClappedAndScrapped campaign gathering another 65 MPs calling for an overhaul of Deliveroo’s terminations process.

“Deliveroo riders are playing a critical role during the COVID-19 pandemic but the company treats them as disposable,” said Jim Baker, Executive Director at Private Equity Stakeholder Project.

“Given its competitors’ moves away from a gig-based workforce, Deliveroo faces substantial reputational risk in failing to adequately address riders’ concerns.”

Earlier this month Uber Technologies Inc (NYSE:UBER), another big player in the so-called gig economy, re-classified 70,000 of its UK drivers as workers after a UK Supreme Court ruling in February.

–Adds analyst comment–

–Adds EdenTree comment–

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