IPO

Red Ink A Red Flag In Deliveroo Takeout Speculation?

It’s becoming a familiar story – or color scheme.

Top line black, bottom line red.

Startup gains traction. Startup gains top line. Startup notches mounting losses, because as everyone knows, you’ve got to spend money to make money. But profitability looks elusive, and becomes less a question of “when?” than “will they ever?”

Thus comes the thought of exit strategy, at least for management and for investors. If operating profits prove elusive, there is always the option of being bought – and for those two aforementioned groups, either cashing out or cutting losses (which, of course, is determined on where you bought in). For bigger firms, cash rich and healthy on the top and bottom lines, the thought of a motivated seller, with strategic value, can prove alluring.

We saw a sign of this strategy with last month’s SiriusXM-for-Pandora deal. The dance had been in motion over a period of several years. And ultimately, the strategic buy was consummated for a few billion dollars, as a busted IPO, as we discussed here.

News comes in recent days echoing that scenario for Deliveroo, the food delivery app that is based in the U.K. but has been expanding rapidly across the ocean – and where the red ink is in evidence, too.

In the latest earnings announcement on Oct. 1, the company said that pre-tax losses for last year were 185 million pounds, up from 129 million pounds in the previous year. As noted in Sky News and other publications, the company spent 106 million pounds on expansion last year, efforts that have brought the firm to have presence in more than 200 locations across the globe. Staffing efforts have ramped up as well, as Deliveroo has hired hundreds of engineers.

In one telling statement, Will Shu, CEO of the company, has said “our growth is matched only by our ambition.” To match that ambition, and to enable expansion efforts, the company went to the fundraising well last year and tapped investors for roughly $500 million USD. Deliveroo became one of those fabled unicorns – firms valued at more than $1 billion – in this case valued at more than $2 billion.

Readers of this space will know that the company has been eyed as an Uber target, as that larger firm has been looking to branch out from its niche of ride-hailing, and has been seeking more of a foothold in the food delivery arena.

Now come rumors that Amazon is interested in the space as well, with its own ambitions to have greater presence in the food game.

All of this comes as Deliveroo has been gearing up for an IPO, and where (permanent) workers have been granted stock options worth roughly 5,000 pounds apiece, as Sky reported.

So, the exit strategy seems to be an IPO – coming to investors for cash – or a buyout. Might Uber have an upper hand, at least in terms of being earlier in the discussions?

Keep in mind that even a premium to the recent $2 billion Deliveroo valuation would be certainly digestible to Uber (which has IPO rumors of its own swirling about), albeit that firm is losing money, too. The company has about $4.7 billion in cash on its balance sheet, per The Wall Street Journal. Amazon? Multiples of that: about $20 billion, per the latest quarterly data.

Just because you can do something doesn’t mean you should.

Uber wants to go where its ridesharing cannot (witness recent attempts to get into the scooter game, for example). London, a tough market for Uber to infiltrate, may open up, as it is a Deliveroo stronghold. Uber Eats has been a point of contention there, as the company has faced negative publicity but has made a concession by hiking its minimum pay levels. Buying Deliveroo, already established, might mean buying a bit of goodwill in Europe.

Amazon? Seems the eCommerce juggernaut has made a pass at the firm before, as reported in The Telegraph, where discussions took place about nine months ago – and, of course, Amazon subsequently launched its own delivery service.

The public market debut? The Telegraph said at the end of last month that Deliveroo plans had been pushed to 2020 from 2019. This gives a bit more time for behind-the-scenes maneuvering with the aforementioned juggernauts.

The purchase price? Financial Times floated that it may be around $4 billion, which would possibly be too rich for Uber (see: cash position) – and it should be noted that a deal would also include some physical plant, as Bisnow recently illustrated that the company operates a number of “dark kitchens,” which are delivery-only kitchens that help restaurants grapple with high consumer demand. This is part of the business model – and, as you know, Amazon has some entrée into running brick-and-mortar a la Whole Foods.

But then again: Red ink, expansion plans and a rumored high selling price may be a bit of a devil’s bargain in the land of unicorns. In the build versus buy debate, might there be a third option worth savoring? It’s called: pass.

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