A Deliveroo distributor rides his bike with a package of groceries on a street on July 31, 2019 in Madrid, Spain.
Jesus Hellín | Europa Press | Getty Images
LONDON – When Deliveroo selected London for its highly anticipated IPO, the food company was hailed as a “true UK tech success story” by UK Treasury Secretary Rishi Sunak.
However, the Amazon-backed company was unable to deliver on Wednesday’s first day of trading. Shares fell sharply as markets opened, with investors questioning Deliveroo’s ability to make profits and a staggering £ 7.6 billion ($ 10.5 billion) valuation.
“This path to profitability is potentially at risk if we see increased regulation of workers’ rights,” Sophie Lund-Yates, equity analyst at Hargreaves Lansdown, told CNBC’s Street Signs Europe.
“I think that’s the main reason we saw so much fear in the trade this morning.”
The food delivery app, founded and run by the American entrepreneur and former Morgan Stanley analyst Will Shu, has become one of the best-known startups in the UK. It employs over 2,000 people in 12 markets and uses a network of over 100,000 drivers to deliver groceries from 115,000 restaurants and grocery stores. In terms of market value, the IPO is the largest in London since Glencore’s initial public offering almost a decade ago.
But the stock was coldly received by investors. Deliveroo has been plagued by concerns about the risks to its business model if regulators take action against the gig economy. Earlier this month, Uber classified all 70,000 of its UK drivers as workers who were eligible for minimum wages and other benefits after the country’s Supreme Court ruled that a group of the app’s drivers should be treated as workers.
Deliveroo issued its shares at just £ 3.90, at the very end of its original range. However, shortly after trading started on the London Stock Exchange, the share price fell 30% to around £ 2.73 and questions are now being asked about how much further it can fall. Theoretically, Deliveroo can cancel the IPO until April 7th, as it has opted for a “conditional offer”.
For comparison, US rival DoorDash saw its shares rise more than 85% on the opening day of trading in December, representing a market cap of over $ 60 billion at the time. Deliveroo is closer to home and faces stiff competition from Uber and Just Eat Takeaway. This rivalry has added to concerns about Deliveroo’s ability to grow its margins and ultimately become profitable.
The Deliveroo listing was led by investment banks JPMorgan and Goldman Sachs, with Bank of America Merrill Lynch, Citi, Jefferies and Numis also being part of the syndicate. The stock was distributed overall, but that didn’t stop them from fueling during the IPO. Some early investors were frustrated with how investment banks rated the company’s stock.
“Flopperoo”
Several top institutional funds avoided Deliveroo’s IPO and pointed out regulatory risks related to the business model and governance. Deliveroo opted for a two-class share structure, meaning its founder would have more voting rights than other investors.
While London is pushing for this type of structure to be allowed into the premium segment of its exchange, making companies eligible for inclusion in benchmark indices such as the FTSE 100, top investment firms have complained that it poses the risk of investor protection to water down.
“Deliveroo went from hero to zero when the much-touted stock market debut fell on its head,” said Russ Mold, investment director at AJ Bell. “It better get used to the nickname ‘Flopperoo’.”
“The narrative took a turn for the worst when several fund managers came out saying they were not supporting the deal because of concerns about labor practices,” added Mold. “This has likely scared a lot of people who have applied for shares in the IPO, which means they are trying to get rid of them.”
Deliveroo attempted to convince its customers in the UK to buy £ 50million worth of shares through its app as part of the IPO. These retail investors, who have been able to spend £ 250 to £ 1,000 on shares, are on hold until April 7th, which means they won’t be able to sell their shares until the restrictions are lifted.
“RIP my invest,” wrote amateur investor and primatologist Sam Elliot on Twitter after seeing Deliveroo’s share price collapse.
“Fortunately, I made the minimum investment of £ 250 knowing it was a risky investment,” he told CNBC.
Fred Destin, a venture capital investor who supported Deliveroo in its early days, is optimistic the company will rebound. “Deliveroo may face headwinds but I am very optimistic about the long-term opportunity,” he told CNBC. “I think over time the market will realize that this is a resilient and sustainable business.”
Manish Madhvani, co-founder and managing partner of tech investment firm GP Bullhound, said the early numbers were a “minor setback” for London, which was “gaining momentum as a listing target.”
It is important to note, however, that the company still has a high priority. “There may have been a pricing error given the market conditions, but instead of making the headlines, let’s not forget how pioneering the Deliveroo model really is,” he said.
Increase in value
Another big concern for investors is the sustainability of high-growth companies like Deliveroo as countries around the world try to reopen their economies. The introduction of coronavirus vaccines has put pressure on trading US technology stocks with a significantly high sales multiplier like Zoom, Netflix and Amazon.
Such companies benefited from lockdown restrictions during the pandemic, which resulted in people spending much more time at home. Zoom, Netflix, and Amazon are still up around 107%, 38%, and 56%, respectively, over the past 12 months.
“From a more cynical standpoint, when everyone is literally locked in their house, conditions are better than ever,” Hargreaves’ Lund-Yates told CNBC. Home trends continue long after the pandemic.
“Is the current rating justified?” She added. “Unfortunately, it’s a case of wait and see. It’s a big question.”
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