It was supposed to be London’s answer to the dominance of tech titans on the US stock exchanges.
Instead, UK investors opted to tell Deliveroo to hop along, with shares plummeting by as much as 30% on the first day of trading.
The PA news agency looks at the reasons why shares fell so sharply and the warning shot it sends to other tech giants thinking that a London listing may be the place for them.
Deliveroo had initially hoped to sell shares for between 460p and 390p a pop. This would value the loss-making business at between £8.8 billion and £7.6 billion.
But a week later, the target price was reduced to between 410p and 390p. In the end it would list at the bottom end of the range at just 390p a share.
Yet even the lowest end of the range was not enough for some shareholders to stomach and prices soon fell, suggesting the valuation had always been too high.
Sources working on the flotation point to the fact that it has been a difficult few weeks, with Initial Public Offerings (IPOs) for four out of six tech businesses in the US already trading down on their listing price – SemRush, Cricut, DigitalOcean and Zhihu.
There are also some suggestions that hedge funds saw how potentially over-valued the firm was and piled in to short positions – essentially betting that shares will fall – although it remains unclear how many short positions have been taken so far.
The biggest losers could be the 70,000 retail investors – primarily Deliveroo customers – who were invited to take part in the stock market listing and will be instantly nursing heavy losses on their investments.
– Corporate governance
Much has been made of the fact that some big-name investors said they would not put money into the Deliveroo IPO due to concerns over the way riders at the company are treated.
In recent weeks, major investors including Legal and General, M&G, Aviva Investors, Aberdeen Standard, BMO Global and CCLA all said they would not invest in the float.
BMO said the employment practices were a “ticking bomb”, whilst M&G said the decision not to invest was “largely driven by the company’s reliance on gig-economy workers in the UK as informal employment contracts potentially fall short in offering the value, job security and benefits of full employment”.
But behind the scenes, Deliveroo is less worried about employment being an issue. The recent Supreme Court ruling against Uber is thought to be unlikely to have a knock-on impact on Deliveroo due to terms and conditions for its riders being significantly different and offering genuine flexibility.
A judicial review finding against Deliveroo is unlikely in the UK and only a reform to the law is expected to change things, although the latest legislation on workers rights under consideration by the Government makes no mention of changes to gig-economy contracts.
Deliveroo does have a court hearing in Italy that could prove costly and there has been talk of changes to workers rights in Spain, but sources at the firm appear unconcerned.
But for all the attempts at allaying concerns, it seems perception is enough to trigger significant doubts.
Big names including Fidelity and T Rowe still piled in, buying big stakes and three anchor investors took a 30% stake in the business.
– The Lord Hill rules
A bigger concern for institutional investors is the structure of Deliveroo’s IPO. The company took advantage of new rules for the London Stock Exchange, drawn up by Lord Hill, aimed at encouraging more entrepreneurs to list in the UK by selling up but being able to retain control.
In Deliveroo’s case, chief executive and founder Will Shu now has an 8% stake in the business, but his shares are known as “Class B shares” which entitles him to 20 votes for every one vote entitled to by all other shareholders.
This means he retains control from a voting perspective. A tug of war between old-school investors and reformists is being played out as some think the new arrangements give Mr Shu too much power. Deliveroo points out that the B shares have a three-year sunset clause, when they revert to having the same voting rights as other shareholders.
Deliveroo will spend £1 billion from the float investing in the business for its expansion. But this appears to be leaving investors on edge. London is dominated by financial firms or companies who tend to dig up and sell rocks, gas and oil. These businesses tend to be profitable when they come to market and can provide a steady flow of income to institutional investors through shares in the spoils – dividends.
Tech companies, like Deliveroo, tend to take far longer to turn a profit until at scale and some worry that the market will look fundamentally different by the time that happens, if at all, for the online food platform.
Ocado spent a decade trying to make a profit, while Amazon in the US also failed to start making money for several years.
Deliveroo will point out it is already profitable in London and, at scale, this will be reflected elsewhere across the group.
But investors more used to the steady returns of a bank or an oil major may not be willing to go on the Deliveroo journey while the post-pandemic recovery remains so unpredictable.