Sep 13, 2023

Deliveroo Mulls Defense Strategies After Sachem Head Buys Stake

Gillian Tan, Crystal Tse, Ruth David and Swetha Gopinath, Bloomberg News

A food delivery courier, working for Deliveroo Plc, uses their phone in Soho, London, UK, on Tuesday, Aug. 8, 2023. Photographer: Hollie Adams/Bloomberg , Bloomberg

(Bloomberg) -- Deliveroo Plc is speaking to its advisers about defense strategies ahead of a governance change that will weaken the control of its founder, according to people with knowledge of the matter.

The UK food delivery platform could become vulnerable when a dual-class share structure — which gives extra voting power to Chief Executive Officer Will Shu — expires in April next year, the people said, asking not to be identified because the information is private. Activist investor Sachem Head Capital Management has been a shareholder in London-listed Deliveroo for some time and believes it could become a takeover target, they said.

Deliveroo’s shares rose 9.4% in early trading on Thursday for their biggest intraday gain since October 2022. The stock was up 6.9% at 8:24 a.m. in London, giving the company a market value of about £2.2 billion ($2.8 billion).

Sachem Head sees Deliveroo as undervalued, though it isn’t yet actively pushing for changes, according to the people. Deliveroo management met Sachem Head in recent months as part of their regular engagement with shareholders during an investor roadshow, they added.

Founded about a decade ago, Deliveroo has become one of the largest delivery companies in the UK. It went public in 2021 and had one of the worst first years of trading for a major London listing amid concerns about its business model and a broader technology selloff. Deliveroo’s shares have slumped about 70% since the IPO.

Share Structure

European rival Delivery Hero SE owns about 6% of Deliveroo’s publicly traded class A shares, while US e-commerce giant Amazon.com Inc. holds more than 12%, according to data compiled by Bloomberg.

Deliveroo founder Shu controls more than half the company’s voting rights thanks to his ownership of class B shares that carry 20 times the voting power of stock held by other investors. The setup is set to expire in April on the third anniversary of the company’s admission to trading, with Shu’s special stock converting into ordinary class A shares.

Citigroup Inc. analysts wrote in a research note that investors have been debating the potential for a deal involving Deliveroo ahead of the expiration of the company’s share structure.

“We expect shares to react positively to this news, as it likely renews investor interest in industry consolidation,” the Citigroup analysts wrote.

Representatives for Sachem Head and Deliveroo declined to comment.

Like other food delivery companies, Deliveroo has had to endure a tough post-pandemic period, with lockdowns ending and takeout orders declining sharply as more people return to restaurants.

Cost-Cutting Drive

To be sure, there have been more positive signs for Deliveroo of late. It’s taken strides toward hitting profitability after a cost-cutting drive and last month announced plans to issue a £250 million capital return to shareholders. Shu has vowed to keep spending under control and the stock has rebounded strongly in 2023.

Still, consumers aren’t buying more. Deliveroo customers placed 145.2 million orders in the first half, a drop from the prior year as inflation weighs on household spending.

Led by Managing Partner Scott Ferguson, New York-based Sachem Head has been labeled “King of the Activists” in the past. Research from the Edge Consulting Group in 2020 found that when the investor took a new position in a company, the target’s stock normally doubled in two years.

This year, Sachem Head launched a campaign against Italian defense group Leonardo SpA, where it helped push through management changes.

(Updates shares in third paragraph, adds analyst comment from eighth paragraph.)