But London’s biggest IPO since 2011 was an unmitigated disaster. The stock plunged when trading started on Wednesday, and the shares eventually closed 26% below their listing price, wiping almost £2 billion ($2.8 billion) off Deliveroo’s initial market capitalization. The stock lost another 1.9% on Thursday.
Why did investors shun Deliveroo when they couldn’t get enough of rivals including DoorDash, which soared 85% in its Wall Street debut last year? A host of factors were behind the flop, experts say, including pricing, timing, uncertain business prospects, concerns over how the company treats workers and increased regulatory risks facing gig economy companies.
“The initial price was just incorrect,” said Alasdair Haynes, the CEO of Aquis Exchange, an upstart rival to the London Stock Exchange and the CBOE. “The people with egg on the face here are the advisers,” he added.
Citing “volatile global market conditions,” Deliveroo had set the IPO price at the very bottom of the range it was targeting, despite insisting that it had “very significant demand from institutions across the globe.” But even that was way too high for investors to stomach.
Several large institutional investors, including Aberdeen Standard Investments and BMO Global Asset Management, pointed to regulatory risk and the limited rights given to Deliveroo workers when they announced days before the IPO that they would not apply for shares.
The decision followed a UK Supreme Court ruling that Uber drivers should be classified as workers, and not independent contractors, entitling them to minimum wage, paid vacation time and a pension.
Forced pension contributions would compress Deliveroo’s already thin margins, added Lund-Yates.
Deliveroo has yet to turn a profit, despite conditions being “as good as they have ever been” for a food delivery service, and it is losing money on most if not all deliveries, she added. “If you add that on top of the regulatory risk there’s a huge question over how margins get off the ground.”
“We find it very difficult to understand how we can value a company that has yet to turn a profit and yet where the forward looking perspective for the business opportunity is quite so uncertain,” said Bevan.
Deliveroo founder and CEO Will Shu was upbeat about the company’s prospects on Wednesday, pointing to plans to invest in delivery-only kitchens and provide customers with more choice. “Our aim is to build the definitive online food company and we’re very excited about the future ahead,” he said in a statement.
Two classes of shareholders
Deliveroo’s ownership structure may also have played a role in its icy stock market reception. It has two classes of shares, allowing its founder to retain control of the company following an IPO, which “may have been on the minds of some of the institutional investors,” according to Lund-Yates.
“We have strong reservations about allowing dual class share structures into the premium segment,” head of UK equities at Aberdeen Standard Investments, Andrew Millington, said in a statement shared with CNN Business. “We believe that the high standards of the premium listing segment are important to provide protection and reassurance to the many millions of individuals who have their savings invested in these companies,” he added.
Dual class shares are also common in the United States and allowed on stock exchanges in Hong Kong, Singapore and China. They are also permitted in Amsterdam, which has overtaken London as Europe’s top share trading center following Brexit.
Another hefty blow to London
The Deliveroo disaster could deal another blow to London, and its renewed efforts to attract more tech company listings.
Brexit has forced banks to relocate some activity away from London, putting its undisputed position as the region’s top financial capital at risk.
Finance Minister Rishi Sunak, who earlier hailed Deliveroo as a “true British tech success story,” was forced to defend the company’s stock market performance on Wednesday during an interview with broadcaster ITV.
“Share prices go up, share prices go down … It’s important businesses like that feel that they can stay in the UK to raise capital,” he said.
That’s likely to be of little consolation to the 70,000 retail investors who took part in the IPO — buying shares worth £50 million ($68.9 million). That’s the biggest participation by small investors in a London listing in years, and the flop could deter them from taking part in future deals.
Hoberman is still optimistic about the outlook for tech company IPOs in London.
“This means that some of the frothier IPOs may get pulled but it won’t affect high quality companies,” he said. “And there’s still another tech company on the [London Stock Exchange] worth over £5 billion ($6.9 billion),” he added.
That’s Deliveroo, despite its dismal debut.