Goldman lines up second tech float
Financial giant Wise set to be unveiled at up to £5bn
GOLDMAN SACHS, a key adviser on Deliveroo’s car crash market debut last week, is brushing aside a storm of protest and is already preparing to unleash its second giant tech listing this year.
Sources last night said Goldman Sachs and Morgan Stanley were on track to sell shares in financial technology giant Wise next month with a valuation of up to £5billion.
Wise, which counts Virgin’s Sir Richard Branson as an investor, is one of the ‘tech stars’ that Chancellor Rishi Sunak hopes will make London a prime venue for Initial Public Offerings – the public sale of shares on the stock market.
The Government commissioned Tory peer Lord Hill and ex-Worldpay boss Ron Kalifa to lead sweeping reviews of IPO rules in a bid to lure fast-growing, tech-savvy firms to Britain. But Deliveroo’s disastrous week, which saw £2billion wiped off its value on its first day of trading, has been a huge setback.
Goldman Sachs and five other banks that led the Deliveroo share float risk losing about £18 million in fees following a backlash from investors, according to one report.
Goldman came under fire when it floated lender Funding Circle in 2018 after shares fell as much as 24 per cent on its first trading day.
But sources close to the fintech Wise said Deliveroo’s bitter experience had ‘no bearing’ on its plans to list. Wise has been profitable since 2017 – in stark contrast with many loss-making start-ups including Deliveroo, sources said.
Wise was among ‘tech stars’ whose representatives met with Prime Minister Boris Johnson last year. Kristo Kaarmann, co-founder of Wise, recently told the MoS: ‘We certainly are one of the largest tech companies in London – and one of the fastest growing ones.
‘There have been regular engagements with the Treasury and with the Government [and fast growing tech firms].’
UK cybersecurity company Darktrace is finalising plans for a £3billion stock market listing, Sky News reported yesterday.
Richard Buxton, a fund manager at Jupiter Asset Management, said: ‘The Deliveroo fiasco does not mean London is closed to exciting growth companies like Wise. But it signals advisers should think carefully about voting structures and, above all, valuations.’ Deliveroo uses dual class shares, which have been criticised for giving company founders greater voting rights over ordinary shareholders. It is understood that Wise is also planning to use dual class shares. However, sources said The Hut Group floated at a value of £5.4billion and also used this structure. Its shares rocketed 30 per cent on its trading debut. But last week’s flotation flop is a blow for Chancellor Rishi Sunak, himself a former hedge fund executive. He has described Deliveroo as a ‘true British success story’. Deliveroo also has a handful of former Treasury advisers working at the firm. When asked by ITV last week if he felt embarrassed by the flop, Sunak brushed off concerns, replying: ‘Gosh, no. Share prices go up, share prices go down. We should celebrate success in this country.’
But financial heavyweights including Aviva, M&G, Jupiter, Aberdeen Standard and L&G have queued up over the past two weeks to criticise the meal delivery company, founded by Will Shu.
Among fund managers’ fears are that Deliveroo may have to give its 100,000 riders worldwide ‘employee’ status which could come at a huge cost to the company. Some Deliveroo workers are said to have earned as little as £2 an hour.
Barry Norris, the fund manager at Argonaut Capital who successfully bet on the share price collapse of disgraced German financial services company Wirecard, said: ‘Considering inflated, never-profitable revenues, unsustainably low labour costs, dubious corporate governance and a greedy valuation, the stock market delivered its own “30 per cent off” verdict’.
Geir Lode, of fund giant Federated Hermes, said Deliveroo’s flexible employment model ‘exposes the company to risks around the future regulations of workers’ rights’ which could hit profitability.
He added: ‘Without significant improvement on [these] issues and more clarity on the firm’s risk mitigation strategies, we have no appetite for Deliveroo at this time.’
The ‘dual class’ shares were also a turn-off for investors. David Cumming, chief investment officer for equities at Aviva Investors, added: ‘I’m generally not in favour of dual class shares because unsurprisingly shareholders want voting rights.’
But Kalifa, the mastermind of the Government’s blueprint for listing more fintechs in Britain, told the MoS that reforms were vital to attract ‘future Teslas and Apples’ to the UK. ‘Dual class shares are attracting scrutiny, but they do play a part in allowing company founders to help fend off corporate takeovers so that shares remain in public hands for longer.’
Kalifa said the City already lags behind New York and China, attracting just 5 per cent of global listings since 2015. ‘Tech-enabled companies are crucial for future economic growth and jobs in the UK,’ he added.
Deliveroo’s finance boss Adam Miller attempted to reassure staff last week. In an email, he blamed ‘volatile’ markets, pointing out that most other European and US flotations are also trading below their initial offer price.
He added: ‘Don’t underestimate Deliveroo. Our share price will go up and down, but in the long run, none of the volatility matters. What does matter is controlling what we can control, executing on our plan and delivering on the targets that we have set out for ourselves and to the market. We have had and continue to have support from wellrespected public market investors through this process.’
But a senior banker told The Mail on Sunday: ‘Deliveroo has been a blow to London as a listings venue. If I were an entrepreneur, I’d think twice about listing in London.’
IN THE first three months of this year, 25 companies listed their shares in London, raising more than £7billion between them. Many of these newly floated firms have done pretty well. Dr Martens’ shares were priced at £3.70 when the company was listed in January. By last week, they had risen to £4.55.
Moonpig floated at £3.50 in February. Today they are more than 20 per cent higher at £4.27. Other, smaller businesses have prospered too, from Manchester fashion retailer In The Style to US-based video games group tinyBuild.
But Deliveroo has flopped. Trumpeted as the biggest listing in London for years, the food delivery firm initially hoped to price its shares at £4.60 each, which would have valued the business at nearly £9 billion.
Last week, bankers behind the flotation were forced to cut the price to £3.90 a share. Even so, the price tanked when trading started on Wednesday morning, falling to a low of £2.71 before recovering to £2.82 by the end of the week.
The sorry performance prompts several troubling questions. How did highly paid bankers read the market so wrong? What do large investors find so troubling about Deliveroo? And, most importantly for individual punters, are these shares likely to go up or down in future?
BAD VIBES: SHUNNED BY BIG INVESTORS
IT WAS less than a fortnight ago – March 22 – when Deliveroo revealed that its shares would be priced at between £3.90 and £4.70 a share, implying a total valuation of between £7.6 billion and £8.8 billion. But big investors had already told The Mail on Sunday that they thought such pricing seemed excessive and that they were unlikely to buy shares, even at the bottom of the range.
Their reluctance was understandable. Last year, Deliveroo raised money in a private funding round which valued the business at around £3billion. In January, another private fundraising valued the group at £5 billion. That the company seemed to be worth at least 50 per cent more just three months later raised eyebrows across the City.
Further concerns centred on the way that Deliveroo treats its riders, the thousands of cyclists and bikers who ride around town transporting food to eager customers.
These workers are not employed.
They are paid for the deliveries they make, with no benefits, no sick pay and no holiday. Deliveroo says that this gives riders maximum flexibility and that thousands of people apply to work for the company every week.
But some of the most high-profile investment institutions in the market – such as Aviva and M&G – have publicly objected to these working practices.
Their objections are not just examples of big money-men trying to show that they have a social conscience. It is more that the way Deliveroo operates could have serious implications for the business.
In Italy, Deliveroo has changed riders’ status to give them more rights and is fighting government claims that they should be entitled to payments backdated to 2015.
Over here, the Supreme Court ruled in February that online taxi firm Uber could not classify its drivers as self-employed, since when the company has said they will be treated as employees, with minimum wage, access to a pension and holiday pay. This has prompted widespread questions about whether Deliveroo and others might have to follow suit.
Deliveroo has highlighted that risk itself, saying: ‘Our business would be adversely affected if our rider model or approach to rider status and our operating practices were successfully challenged or if changes in law require us to reclassify our riders as employees.’
The group has also set aside more than £112million to cover potential legal costs associated with riders’ employment status.
BIG LOSSES: HOW FIRM FAILED TO DELIVER
THIS kind of wrangling could be brushed aside by hard-nosed investors if Deliveroo was making huge amounts of money. But it is not.
Founder Will Shu likes to point out that Deliveroo works with 115,000 restaurants and food retailers, providing meals and groceries to six million consumers worldwide.
Last year, the amount of money these hungry eaters spent via Deliveroo rose 64 per cent to £4.1billion, with over half that figure coming from the UK and Ireland. But, after stripping out expenses, the group made a pre-tax loss of £225million. In fact, it has not made a profit since Shu started the business in 2013.
Shu and his team are optimistic that this will change and that longterm prospects are good. As he explains: ‘There are 21 meal occasions in a week – breakfast, lunch, and dinner – seven days a week. Right now, less than one of those 21 transactions takes place online. We are working to change that.’
Outside observers question this ambition. Restaurants have been shut for much of the past year so it is not surprising that demand for takeaways soared.
Now, as lockdown eases, consumers are keen to go out again. The food delivery market is highly competitive too so profit margins are wafer thin and would become even more so if riders were deemed employees rather than gig workers.
Many restaurants offer home deliveries directly to local punters, cutting out Deliveroo entirely. Such a trend may become more entrenched following the pandemic.
And big investors were none too pleased with the way that this flotation has been structured, which gives Shu 57 per cent of voting rights, even though he has a stake of just 6.3 per cent in the business.
He has the ultimate say over any big decisions in the business, a status that goes against the grain of publicly owned firms.