Deliveroo shares rise after Delivery Hero buys 5.1% stake

British food delivery company's stock recovers after disastrous London debut in April

A Deliveroo food courier at work in London, Britain. Delivery Hero is now a top-10 shareholder in Deliveroo. EPA

Deliveroo shares jumped in early trading on Tuesday a day after rival Delivery Hero bought a 5.1 per cent stake in the British food delivery company, sending its stock soaring the most since its disastrous debut on the London Stock Exchange.

Deliveroo’s shares were up 10.18 per cent to £3.74 at 11.35am London time in a further vote of confidence for the company’s stock after Germany’s Delivery Hero snapped up a £300 million ($415.9m) stake in the company.

The move saw Deliveroo's shares rise by as much as 11 per cent on Monday – the biggest gain since the company’s initial public offering in March – after the business disclosed on the LSE, where its shares are listed, that a holding of 5.09 per cent had been built up by the Berlin-based competitor.

Delivery Hero bought the shares at an average price of about £2.70 apiece when it started acquiring them in April, the company’s chief executive, Niklas Oestberg said in a series of tweets.

The company was “oversold” at the IPO, he said, has a “decent profit margin” and “felt undervalued to us".

At that price, Delivery Hero may have spent about £235m on the stake, according to analyst calculations. Mr Oestberg said the company was not buying any more Deliveroo shares “at this point".

“We considered all possible scenarios back in April when we start acquiring our stake. In no scenario would this be a bad investment long term,” Mr Oestberg tweeted.

He also said he has known Deliveroo’s chief executive “for many years” and has “a huge respect for what he and his team have built”.

The deal makes Delivery Hero a top-10 shareholder in Deliveroo. The Berlin-based company already owns stock in a number of companies in the industry, including Just Eat, Spain’s Glovo and India’s Zomato.

Deliveroo needed a boost to its share price after its disastrous debut on the LSE on March 31, that resulted in its share price falling by 30 per cent on its first day of trading, wiping more than £2bn off the company's £7.59bn value.

Despite the surge in the share price over the past couple of days, it is still down 12 per cent from the IPO price.

Danni Hewson, a financial analyst at AJ Bell financial analyst, said Delivery Hero’s stake in the company caused intrigue for the markets.

“Confirmation that German rival Delivery Hero had acquired a stake in the business sent shares soaring to heights not seen since it made its eventful debut on the stock exchange," Ms Hewson said.

"Could this be the first step in a well-orchestrated take-over campaign?”

Delivery Hero offers food delivery services in more than 400 cities globally and has about 22,000 employees. AFP

Deliveroo, which did not comment on the Delivery Hero stake, will release its half-year results on Wednesday, which investors hope will be positive after orders rose sharply in the second quarter of this year, up 88 per cent from the same period a year ago.

Orders in the UK and Ireland were particularly strong, growing by 94 per cent to 38 million in the three months to the end of June, while the group's international segment grew by 83 per cent to 40 million over the same period.

While investors might hope for a takeover by Delivery Hero, Ms Hewson said they will also be considering Wednesday’s results, "which should show revenue growth, though the business will have to answer questions about projected sales now hospitality has firmly reopened for business".

London's FTSE 100 inched slightly higher on Tuesday, up 0.1 per cent as optimism about strong corporate earnings eclipsed fears over a global jump in coronavirus cases and gains in travel and leisure stocks were cut short by weakness in heavyweight banks as they tracked bond yields lower.

Travel stocks have gained about 11 per cent since the UK eased lockdown restrictions on July 19. The industry has been among the top sectoral performers so far this month on optimism for travel demand to pick up pace.

However, Ms Hewson said the FTSE 100 "was struggling for direction like a new driver without their satnav" on Tuesday morning as investors assessed a weak session on Wall Street overnight and slowing growth in UK consumer spending.

“With the flood of big companies reporting on both sides of the Atlantic slowing to a trickle and with trading volumes seeing their usual summer lull, there is a sleepy feel to the markets at present," she said.

“Mounting concern that the spread of the Delta variant might set back the Chinese recovery, after it became the first major economy to emerge from the pandemic, is a risk the world will be watching.”