Fund managers smell something whiffy about a food-delivery IPO

AS STOCK TICKERS go it is hard to beat “ROO”, a syllable that for many British investors will evoke a bouncy marsupial from “Winnie the Pooh”. Deliveroo, an eight-year-old, kangaroo-logoed startup is due to float on the London Stock Exchange on March 31st at a valuation of around £8bn ($11bn). It will be one of the biggest and most anticipated British listings in years. If ROO jumps after listing and the firm goes on to prosper it would signal the City of London’s post-Brexit prowess. But just as in a tale from A.A. Milne, the protagonists have lately run into a spot of bother.

Starting a week ago, some of the City’s biggest fund managers—Legal & General, M&G, Aviva and Aberdeen Standard—made clear they would not be participating in the IPO. The latest to shun Deliveroo is Baillie Gifford’s James Anderson, a tech investor who manages Britain’s biggest investment trust.

The reasons for the cold-shouldering are varied, and related. Deliveroo has suffered from growing criticism of the gig economy. In February Uber, a ridesharing company that also delivers food, lost a long-running legal battle when Britain’s Supreme Court ruled it must treat drivers as workers, not as though they were self-employed.

Now critics of gig-economy practices are homing in on Deliveroo. An analysis of 300 couriers’ takings during the past year published on March 25th found that one in three of its riders made on average less than £8.72 an hour, the national minimum wage for those over 25, for their overall time per session in the app.

That may be somewhat misleading. Edgar, a Deliveroo rider who works in south London, notes that couriers can choose to log in to the app from the suburbs, when they are still far from restaurants, meaning a low average take if the whole period is counted. For his part, he consistently makes between £9 and £11 an hour. Deliveroo allowed him to carry on earning when his usual restaurant jobs dried up during the first lockdown. One of the study’s lowest earners works in Yorkshire, where patches of low population density are common.

Nevertheless, City investors worry that Deliveroo’s gig-economy employment practices are unsustainable. It could face a regulatory crackdown, as Uber has. In IPO documentation the company warned investors that it faces legal inquiries in Britain, France, Spain, the Netherlands and other markets.

That big British institutions are taking such a high-profile stand on the “S” in “ESG”—environmental, social and governance—sets a fresh precedent. It is the first time that prominent Western fund managers have publicly avoided a big IPO on such grounds. Their protests are hardly up there with Extinction Rebellion demonstrators glueing themselves to corporate offices; still, for a conservative industry, the stance is fairly radical.

Their moves will not help London win more hot tech listings. Deliveroo’s co-founder and chief executive, Will Shu, could have gone for New York, but Boris Johnson and others urged him to pick London. The boss of the stock exchange declared that Deliveroo’s IPO highlights British capital markets’ ability to support global tech companies. Rishi Sunak, the chancellor, hailed the firm as a “true British tech success story”.

To entice more such successes the government has recommended relaxing listing rules. A review led by Jonathan Hill, formerly Britain’s European Union commissioner in charge of financial services, concluded earlier this month that Britain should give dual-class shares for the first time access to the “premium segment” of the regulator’s official list of securities, meaning entry to the main FTSE indices. Dual-class shares are a structure beloved of Silicon Valley founders as it lets them retain near-total control of their creations while cashing in.

Both Singapore and Hong Kong have allowed dual-class structures without suffering bad consequences, notes Huw van Steenis, chair of sustainable finance at UBS, a bank. But the “G” in ESG is not helping London’s tech-listing ambitions either. The signs are that fund managers are opposed to the reforms. This week they added Mr Shu’s dual-class structure to their list of reasons to steer clear of Deliveroo. Each of Mr Shu’s shares will have 20 votes as opposed to just one for everybody else’s, for a period of three years.

Some observers reckon the institutions are grandstanding. Some of them have investments in other gig-economy companies, notably in Uber. Their true worry is probably the firm’s ropy business model. In contrast to, say, the software business, in food delivery costs go up largely in line with revenue.

Last year, after a bid by Amazon to take a stake triggered an investigation by the Competition and Markets Authority, Deliveroo kept the investment partly by arguing it would go bust without Amazon’s help. That was in the depths of pandemic-related panic, and Deliveroo’s revenues later soared as people ordered in, but the firm still lost £224m in 2020. The future is uncertain for food delivery as vaccine rollouts herald the reopening of restaurants. Tech stocks globally have dipped of late, adding to the worries.

There is little doubt that the show will go on. Deliveroo won enough takers for its shares on the very first morning of its roadshow last week. On March 29th it slightly lowered its expectations on price—it is still likely to be worth around the same as Rolls Royce, Britain’s flagship engineering firm. But Deliveroo’s pre-IPO travails could leave a bad taste—rather like Roo being dosed with extract of malt.