Deliveroo deal shows UK still can’t hang on to big firms

The takeover of Deliveroo by its US counterpart DoorDash is an illuminating example of the differing fortunes and attractions of US and UK stock markets.

DoorDash’s offer for Deliveroo values the business at £2.9bn and will create a company with operations in more than 40 countries.

While both are similar companies, their fortunes have dramatically diverged over the past few years.

Both started out as food delivery services offering customers convenient and speedy access to their favourite restaurants and offering restaurants the ability to more fully utilise the capacity of their kitchens.

Both extended their offerings to include other convenience shopping items – like nappies, flowers and pet food.

Both raised money by selling shares to the public in an initial public offering (IPO) around the same time – Deliveroo on the London stock market, DoorDash on the New York Stock Exchange.

But when Deliveroo listed its shares in London, DoorDash was worth five times as much as its UK counterpart. Four years later DoorDash was worth 35 times as much.

This is not a perfect comparison as DoorDash has issued more shares to raise money to expand over time which would boost its total value – its market capitalisation. But the appetite for shares in the US company meant that it could successfully raise that money on US markets.

Let’s look at another measure – the price of each share.

An investor who bought a share of DoorDash has seen its value rise 84%.

An investor who bought a share of Deliveroo has seen its value fall 56%.

What this means is that DoorDash is now in a position to use its greater financial heft to take over its UK rival – just as Deliveroo is finally turning a profit.

One of Deliveroo’s first backers, Danny Rimer of Index Ventures, told the BBC in 2023 that if he had his time again he would have voted for a US listing, and people close to the company agree that the current takeover bid was partly enabled by DoorDash’s access to US capital markets.

This is just one example which helps explain a wider problem. Companies are increasingly shunning the London stock market in favour of a US listing.

There are many reasons.

Higher valuation. The 500 largest publicly traded US companies (S&P 500) are worth, on average, 28 times the profit they make in a year. The 100 largest publicly traded UK companies (the FTSE 100) sell for 12 times their yearly earnings. Less than half.

How can there be such a huge disparity?

Partly because the US is home to most of the world’s most successful and profitable companies – the so-called Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla)

Take those out and shares trade at 20 times earnings – still a massive premium to the UK.

One of the other reasons UK valuations lag is old-fashioned lack of demand.

UK investors’ appetite for UK stocks has shrivelled.

Over the last 30 years, the share of the UK market owned by UK financial institutions has shrunk from 50% to less than 5%. This is partly because financial regulation has encouraged pension funds to buy less risky investments like government bonds.

But it’s also partly because the managers of those pension funds think they will get better returns investing in US markets – and they have been dead right.

In just the last five years, the total return including dividends on investing in US shares has been 116% while the same number for the UK is 45%.

But there are changes afoot.

The government’s so-called “Edinburgh Reforms”, designed to make listing in the UK more attractive, included reducing the proportion of a company available for sale to the public and retaining more voting power for founders who wanted to keep control of the company even as they sold stakes to others.

There have also been positive comments on the attractiveness of the UK from financial giants like Larry Fink of BlackRock and Jamie Dimon of JP Morgan.

They both noted the UK looks undervalued and the UK market has outperformed the US so far this year.

The secret that UK stocks are cheap has been out there for some time. That is precisely why private buyers from the US and elsewhere have swooped on UK-listed companies meaning they disappear from the UK stock market.

Even some of the biggest ones left are considered candidates for a move. Shell boss Wael Sawan told the BBC that while he had “no immediate” plans to move, he and his company “got a very warm welcome” when they held their big reception for investors in New York. Shell trades at a 35% discount to its US-listed peers and many of its shareholders aren’t happy about it.

What the DoorDash swoop on Deliveroo seems to highlight once again is that companies listed in the US can summon greater financial firepower with which to expand or acquire their rivals.

Deliveroo will join the likes of Arm Holdings, Morrisons, CRH Holdings, Ultra, Meggitt and many others as companies who used to be listed on the London Stock Exchange.

Does it matter? Pension funds, or individual investors, can buy shares whether they are listed in the UK, US or one of the European exchanges.

But a UK listing generates significant ancillary business for a UK financial services industry that still makes up more than 10% of the UK’s entire economy and contributes more than 10% of all taxes paid here.

Accountants, lawyers, financial PR firms and others feed off the fees that UK listings generate.

Trading on the London Stock Exchange is dwarfed by the trading of currencies, bonds and complex contracts but it has always been a centre of gravity for financial activity and one which many argue has lost its power to attract.