A Deliveroo distributor is seen riding his bicycle with food packages on the road on July 31, 2019 in Madrid, Spain.
Jesus Hellín | Europa Press | Getty Images
LONDON – When Deliveroo choosing London for its long-awaited IPO, the food delivery company was hailed as a “true British technology success story” by UK Finance Minister Rishi Sunak.
But AmazonSupported companies failed to deliver on the first day of trading Wednesday. Stock fell sharply when the market opened, with investors questioning Deliveroo’s ability to turn a profit and a tantalizing valuation of £ 7.6 billion ($ 10.5 billion).
“It is the path to profitability that is potentially under threat if we look at increased regulation around workers’ rights,” Sophie Lund-Yates, an equity analyst at Hargreaves Lansdown, told CNBC’s “Street Signs Europe”.
“I think that’s the biggest reason we saw so much anxiety being injected into the trade this morning.”
The food delivery app – founded and led by American entrepreneur and former Morgan Stanley analyst Will Shu – has become one of the UK’s most famous start-ups. The app employs more than 2,000 people in 12 markets, and uses a network of more than 100,000 motorists to deliver food from 115,000 restaurants and wholesalers. By market value, its IPO is the largest in London since then Glencore went public nearly a decade ago.
But the stock received a cold reception from investors. Deliveroo has been plagued by concerns over the risks of its business model if regulators crack down on the show economy. Uber reclassified all of its 70,000 British drivers as workers are entitled to minimum wages and other benefits earlier this month, after the Supreme Court ruled a group of application drivers should be treated as workers.
Deliveroo issues its shares for just £ 3.90, right at the bottom of its starting range. However, shortly after trading began on the London Stock Exchange on Wednesday, the company’s share price had fallen 30% to around £ 2.73 and questions are now being asked about how far it could fall. Theoretically, Deliveroo could cancel the IPO until April 7 because it has chosen “conditional offer.”
In comparison, US rivals By Dash saw its stock jump more than 85% on its opening trading day in December, giving it a market capitalization of more than $ 60 billion at the time. Closer to home, Deliveroo faces stiff competition from companies such as Uber and Just Eat Takeaway. The competition has added to concerns about Deliveroo’s ability to grow its margins and eventually become profitable.
Deliveroo’s listing is led by investment banks JPMorgan and Goldman Sachs, while Bank of America Merrill Lynch, Citi, Jefferies and Numis are also part of the syndicate. The stock was placed in its entirety but that didn’t stop it from drifting, frustrating some early investors with how the investment bank priced the company’s shares.
Some of the top institutional funds have avoided Deliveroo’s IPO, citing regulatory risks around its business model and governance. Deliveroo decided to opt for a dual class stock structure, which meant that its founders would have more voting rights than other investors.
While London is pushing for this type of structure to be allowed in the premium segment of its stock market – which makes companies eligible for inclusion in benchmark indexes such as the FTSE 100 – top investment firms complain that this could risk undermining investor protections.
“Deliveroo has gone from hero to zero as the debut of the much-loved stock market failed miserably,” said Russ Mold, director of investment at AJ Bell. “Better get used to the nickname ‘Flopperoo’.”
“The narrative turned for the worst when some fund managers walked out and said they would not support the business because of concerns about work practices,” Mold added. “This may scare off a lot of people who put up shares in the IPO offering, meaning they are racing to get rid of it.”
Deliveroo is trying to convince its UK customers to buy a £ 50 million stake in an IPO through its app. These retail investors – who are able to spend between £ 250 and £ 1,000 on shares – are locked up until April 7, meaning they can’t sell their shares until the restrictions are lifted.
“My investment RIP,” wrote amateur investor and primate expert Sam Elliot on Twitter after seeing the drop in Deliveroo’s share price.
“Thank God I made a minimum investment of £ 250 because I knew it was a risky investment,” he told CNBC.
Fred Destin, a venture capital investor who supported Deliveroo in its early days, is optimistic that the company will recover. “Deliveroo may face some obstacles but I am very optimistic about the long-term opportunities,” he told CNBC. “I think the market will over time realize that this is a resilient and viable business.”
Manish Madhvani, co-founder and managing partner at technology investment firm GP Bullhound, said the preliminary figures were “a bit of a pullback” for London, which is “gaining momentum as a listing destination.”
However, he said it was important to note that the company’s value was still high. “There could be mistakes in pricing given market conditions, but we shouldn’t forget how much really pioneered the Deliveroo model, rather than getting caught up in the headlines,” he said.
Another big concern for investors is the sustainability of high-growth companies like Deliveroo as countries around the world seek to reopen their economies. The launch of the coronavirus vaccine has put pressure on trading in US technology stocks with revenue doubling significantly, such as Zoom in, Netflix and Amazon.
Such companies are benefiting during the coronavirus pandemic due to lockdown restrictions that have resulted in people spending more of their time at home. Zoom, Netflix and Amazon are still up around 107%, 38% and 56% respectively in the last 12 months.
“From a more cynical point of view, conditions are almost as good as they would ever be when everyone was completely locked in their house,” Hargreaves’ Lund-Yates told CNBC, adding that the company “really relied on” stay-at- home trends continued long after the pandemic.
“Is the current assessment justified?” he added. “Unfortunately this is a case of waiting and seeing there. It’s a big question.”