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Deliveroo serves up a setback to London’s IPO hopes

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In the manner of one of its riders turning up with a box of pizza, Deliveroo’s initial public offering came along with apparently good timing just as the London market was keen to show it can attract “hot” tech listings. Regrettably, the pizza arrived cold. The 26 per cent share price fall on Deliveroo’s opening day was a blow to City ambitions to fend off competition from the US and exchanges such as Amsterdam in attracting high-growth companies. It sharpens the government’s dilemma as it considers plans to reform listing rules to make the UK market more enticing, amid some investor unease.

The fact that Deliveroo’s offering fizzled does not, in itself, mean London cannot attract future tech listings. Tech debuts have disappointed before — think of Facebook, or Ocado. Several specific issues, moreover, lay behind Deliveroo’s failure to deliver. The offer proved poorly timed, with the market appetite for tech stocks waning as bond yields rose. Some investors were wary of its dual-class structure, and potential risks to its model after UK courts ruled Uber should treat its drivers as employees. Some saw the pricing as stretched for a company that made a £224m loss last year despite surging demand for takeaways in lockdown.

Yet the optics were poor. Other jazzy tech, green or life sciences start-ups may follow Cazoo, the used-car sales portal, in opting instead to go public in New York, perhaps by backing into a special purpose acquisition company — the big trend of the moment. Indeed, the longer London stands aside from the Spac craze, the more it risks hot growth prospects being snatched from under its nose. The more UK institutional investors remain wary of dual-class share structures, meanwhile, the more founder-chief executives — anxious to ensure they can fulfil their vision for the company they created — will go elsewhere. Hence the proposals from Lord Jonathan Hill to ease constraints on both.

Some investors, along with the Financial Times, have warned that regulators should tread carefully in changing rules to allow a rush of Spacs to London. The Hill review proposed removing a disincentive for Spacs to list by no longer forcing their shares to be suspended when they announce a potential acquisition, which can leave investors “locked in” even if they don’t like the target. Spac shareholders would gain protections, such as a shareholder vote on the takeover, and redemption rights. But careful consideration must be given to what kind of financial projections Spacs can and are obliged to offer investors — and the post-deal “lock-ins” required for Spacs’ sponsors.

Proposals to allow companies with dual-class share structures to pursue “premium” listings, provided they have five-year time limits and a maximum weighted voting ratio of 20:1, are reasonable. Deliveroo, despite having a large enough capitalisation, was barred from inclusion into the FTSE 100 because of the outsized voting rights granted to Will Shu, its co-founder and chief executive — depriving it of tracker fund investment. Yet given some institutions steered clear of Deliveroo in part because of the share structure, it is clear changing the rules is only part of the story; culture change is needed too.

While some investors may say they could not see a clear path to sustainable profits for the food delivery company, some entrepreneurs suggest UK institutions are less willing to back lossmaking tech start-ups — however strong their outlook — than their US counterparts. Investors have reason for caution. But successful tech investing often means backing a lot of risky companies on the assumption many will fail, but the winners will be worth it.



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Why it won’t be Deliveroo that casts a shadow on Darktrace

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You’d have thought a company would need to be brave or foolish to follow in Deliveroo’s smoky wake on to the London market. 

In the event, cyber security company Darktrace appears to be neither. Perhaps because this looks quite a different type of tech offering.

For a start, it has some proper technology behind it. Such is the enthusiasm for showing the UK can attract digital fare that there has been a tendency to pump everything with a website like it’s the next great tech play. 

But Darktrace boasts that it uses machine learning and artificial intelligence in cyber security software. Traditional cyber defence involves building walls against potential attacks, which then must be adapted and replicated as threats evolve and change. Darktrace, founded in Cambridge in 2013, instead deploys its software to understand what a business’s “normal” state is; it says it can then use that to identify and prevent attacks quickly.

In other areas, too, Darktrace should be able to shrug off comparisons. One of the less-discussed concerns around Deliveroo, whose shares fell again Monday to trade about 35 per cent below the offer price, was whether the app with bicycles model really translated into a viable, scalable business beyond its home market. 

Darktrace, in contrast, had more than 4,600 customers in more than 100 countries at the end of last year, up from about 1,600 in 2018. Its software is quick to deploy, meaning it can sell by installing its system and letting it show its worth in a two or three week trial. Subscription contracts mean predictable, recurring revenue.

The cyber company also isn’t as obviously riding high on the back of lockdowns. True, travel restrictions meant lower marketing spending. Normal sales activity would have largely wiped out the adjusted ebitda (earnings before interest, taxes, depreciation and amortisation) profit of $9m for the year to June 2020. (But still, something resembling a profit! In tech!). 

Sales constraints after a pandemic-related hiring freeze will help keep all-important revenue growth to 36-38 per cent this financial year, compared with 45 per cent in 2020, a slowing growth profile that might concern some tech aficionados.

Still, accelerated digital adoption and more remote working should be a boon for cyber companies longer term. And while Darktrace doesn’t have the top-line growth of some US software as a service or cyber peers, like Snowflake or Zscaler, nor is it seeking the same valuation. A mooted $5bn price tag is a sharp step up from its last private valuation of $1.65bn. But it doesn’t look out of line with where some sector companies are trading, according to Public Comps.

Governance is a more complex issue. Darktrace’s five founders, who remain on the management team, aren’t worked up enough about control to demand special treatment. Unlike Deliveroo, there will be no dual-class share structures. 

Its problems are legal rather than structural. Mike Lynch, the former Autonomy boss, was an early investor in Darktrace through his company Invoke Capital. He’s fighting extradition to the US on fraud charges, which he denies, related to the sale of Autonomy to Hewlett-Packard in 2011. His former chief finance officer Sushovan Hussain, also an Darktrace investor, was convicted on similar charges in 2018.

It’s hardly an ideal backdrop to a market debut. And the risk factors in the prospectus make for ugly reading: Darktrace was subpoenaed by the US Justice Department in 2018 and warns it could face potential liability under possible money laundering charges (though it considers successful prosecution a “low risk”)

Lynch left the board of Darktrace in 2018, sufficiently long ago to alleviate concerns about any day to day influence.

But the listing documents suggest a rather tortured attempt to put distance between two things that have been quite closely intertwined. Several Darktrace executives, including its chief executive, were previously employed by Invoke and Autonomy. Lynch was on Darktrace’s advisory council until March 2021, when he moved to a newly-created science & technology council. Invoke has historically provided services to Darktrace, including until recently two employees in its finance operations in Cambridge.

The question is whether potential investors can get comfortable with the reputational headaches — and to focus more on Lynch’s ability to spot homegrown tech potential and less on his continuing legal battles. If they can, Darktrace looks like the kind of tech listing the London market has actually been hoping for.

helen.thomas@ft.com
@helentbiz





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Paper producer Segezha plans Moscow IPO

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Paper producer Segezha is planning an initial public offering on the Moscow exchange, making it the latest in a series of Russian companies looking to tap surging investor demand.

Segezha, which is owned by oligarch Vladimir Yevtushenkov’s Sistema conglomerate, said on Monday that it wanted to raise at least Rbs30bn ($388m) in the IPO. It is seeking a valuation of more than $1.5bn, according to a person familiar with the plans.

The structure of the offering will allow Sistema to retain control of the company.

Russian companies are rushing to go public in response to high demand for emerging market assets and in case geopolitical tensions with the west make it harder to list.

The stimulus-fuelled global stock market boom and a rebound in commodity prices have helped Russia’s market recover quickly from the pandemic.

The Moscow exchange’s benchmark index hit record highs in March and Russian central bank rates remain near an all-time low. Last year, the bourse doubled its number of retail investors to 10m as homebound traders moved away from bank deposits.

In March, discount retailer Fix Price held the largest Russian IPO since the US and EU imposed sanctions against Moscow in 2014. Ecommerce site Ozon, which is co-owned by Sistema, has more than doubled its valuation to about $12.5bn after going public in New York last year.

But the sell-off of the rouble on tensions with the US and the military build-up on the Ukrainian border has underlined that going public remains precarious.

GV Gold, a midsized goldminer whose key shareholders include BlackRock, said late last month it would postpone its IPO — the third time the company has announced a listing then backtracked — because of “elevated levels of market volatility in both the global and Russian capital markets”.

Segezha, which reported nearly $1bn of revenue last year and operating profit of $242m, is the fifth-largest producer of birch plywood in the world and is in the top two for production of heavy duty “multiwall” paper packaging.

Prices for its products have rebounded during the recent economic recovery, while 72 per cent of its revenue comes from export sales in foreign currencies — allowing it to take advantage of the weak rouble at its mostly Russian cost base.

“Bringing Segezha Group to the public markets will crystallize the value of our investment, raise funds that would allow Segezha Group to continue to pursue its investment projects and provide investors with the opportunity to share in the company’s strong growth and benefit from attractive returns,” Sistema chief executive Vladimir Chirakhov said in a statement.

JPMorgan, UBS, and VTB Capital are joint global co-ordinators and joint bookrunners on the IPO. Alfa Capital Markets, Gazprombank, BofA Securities, and Renaissance Capital are joint bookrunners.



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Spac boom under threat as deal funding dries up

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A crucial source of funding for blank-cheque company deals is drying up, pointing to a slowdown for one of Wall Street’s hottest products after a record-breaking quarter. 

Advisers to special purpose acquisition companies, which float on the stock market and then go hunting for a company to buy, say they are struggling to find so-called Pipe financing to complete their planned acquisitions. Pipe is short for private investment in public equity.

Institutional investors such as Fidelity and Wellington Management have ploughed billions of dollars into Pipe deals since the Spac boom emerged last year, providing a route to the public markets for businesses ranging from established software and entertainment companies to speculative developers of flying taxis and electric vehicle technology. 

But people involved in arranging the deals say Pipe investors are overwhelmed by the sheer volume of transactions and put off by rising valuations. 

“There is a lot of indigestion,” said one senior bank executive. “The pendulum has swung to where if you’re in the market with a Pipe right now, it’s going to be really hard and painful. A Spac goes back into the ocean if you can’t get a Pipe done.”

Spacs raise money when they first list on the stock market but they typically require more capital to fund their acquisition. Large institutional investors also act as a form of validation of the target company’s business prospects and its valuation.

There have been 117 deals announced this year, but the growing backlog in Pipes could prove to be a big roadblock for the 497 blank-cheque companies that are still looking for a deal, according to Refinitiv data.

Only about 25 per cent of Spacs listed since 2019 have completed deals so far. Sponsors typically have two years to complete a merger, otherwise they have to return the capital they raised to investors.

Several market participants said the slowdown would lead to a “flight to quality” and put downward pressure on the valuations of acquisition targets, which have skyrocketed in recent months.

Almost all of the executives the Financial Times interviewed said they were seeing Spac deals recut to offer more favourable terms to Pipe investors. One said: “It’s called the buy side for a reason.” 

Because Pipe investments are considered illiquid — the money is tied up at least until the deal closes and there may be a lock-up period after that — investors can usually get favourable terms. They can see the deal before it has been announced to the public and are almost always able to buy in at the Spac listing price of $10.

But earlier this year, Pipe investors were clamouring to get in on Spac deals. The group of institutions that backed Churchill Capital IV’s acquisition of electric carmaker Lucid paid a 50 per cent premium to the Spac listing price to get a stake, almost unheard of at the time.

The recent reversal has Pipe investors negotiating lower valuations for businesses, giving them larger stakes for the same amount of money, and better pricing terms.

“There’s only so much illiquid exposure investors are going to want to take,” said another bank executive who has worked on numerous Spac deals.

The Pipe slowdown is bad news for banks, which are unable to collect on advisory fees if they cannot sell a deal to investors.

It is also starting to affect the pipeline of Spac launches, lawyers and bankers said. In the first seven days of this month, only four blank cheque companies have gone public. That compares with 41 during the first week of March and 28 in February, Refinitiv data shows. 

“Where we had been at a crazy, mad, rush pace in January and February, we’re kind of at a standstill right now on the IPO side,” said Ari Edelman, partner in Reed Smith’s corporate practice.

For those that already went public and are looking for a target, he added, “the hope is this is just a bump in the road. And then ultimately the deal gets done.”



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