• Solal Bauer

Analysis: Deliveroo's IPO Flop

New ROO.Ls


In the “worst first-day performance for a big London IPO”, shares in Deliveroo (ROO.L) plunged over £2bn within the first minutes of their Wednesday trading debut on the London stock market.


The 390 pence price tag, giving an overall valuation of £7.6bn at opening, was already set at the bottom of a target range in an effort to ‘price responsibly’ amid volatile market conditions. It fell to a low of 275p at one stage - a 30% fall. The company had initially hoped for a valuation of up to £8.8bn.


The listing was the largest tech float yet on the London Stock Exchange, and the biggest London IPO since Glencore’s in May 2011.


In an IPO, shares are priced by investors and offered to investors before listing. Once publicly traded, the share prices are set by supply and demand.





Gig Economy Concerns


Some of Britain’s biggest investment fund managers (Aberdeen Standard, Aviva Investors, BMO Global, and more) withheld investment in the IPO, citing Deliveroo’s gig economy working conditions as a major deterrent.


Deliveroo does not currently offer its employees traditional benefits like company pension contributions or health insurance. It is unclear how that company will tackle these allegations; Deliveroo’s flexible employee model is a big part of its success, and offering employee benefits would wipe out the brand’s already thin margins.


This comes in the wake of Uber’s defeat before the UK’s Supreme Court, which ruled that its drivers were not self-employed, and thus entitled to the minimum wage and holiday pay. Though Deliveroo insisted that the Uber ruling was of little consequence to their business, investors may have been unconvinced.



Over-Valued?


Deliveroo has yet to become profitable; the company lost £317.3m in 2019, and a further £223.7m in 2020.


Neil Wilson, chief market analyst for Markets.com, said that "even pricing the initial public offering at the bottom of the range, Deliveroo was demanding too high a price tag for a loss-making delivery platform in a very competitive space with a questionable path to profitability”.


Russ Mould, Investment Director at AJ Bell, asked “how could a company that was valued at 3 billion (pounds) in November, 5 billion in January, be magically worth 8-9 billion in March - particularly when according to its own statements it was potentially in need of emergency funding last year”?


Investors also had concerns about the IPO’s share structure, which gave founder Will Shu’s shares twenty times the voting power of other investors.



COVID-19


It is no secret that Deliveroo’s food delivery service has surged in popularity during a year of closed restaurants. Additionally, there has been a clamour for growth companies over the last year as the health crisis lowered interest rates to all-time lows.


But many feel that this heightened success is unlikely to outlast the pandemic. Fabian de Smet, head of investment banking at Berenberg, said that ‘investors are turning away from the work-at-home play and putting their money into the economic-recovery play. Deliveroo got caught in the middle of a huge rotation. It was the last IPO of the old Covid world.”


COVID-fuelled growth is also a poor basis for long-term investment. The fact that Deliveroo’s fast pandemic success did not make up for its big losses in a competitive market may have dampened its IPO.



An Industry Problem


Many other growth stocks are facing similar dips in their market performances. Just Eat, Takeaway.com, and Delivery Hero have all fallen around 12 per cent each in the past month. DoorDash, an American alternative, has fallen as much as 40% in the same time.


Additionally, IPO price plunges are somewhat common; shares often rebound on their debuts as the managing banks make use of the over-allotment to stabilise the price. That said, Danni Hewson, a financial analyst at AJ Bell, said “anyone thinking Deliveroo might rise phoenix-like from the flames at the end of its first day of trading will be sorely disappointed.”



The Broader Impact


The largest on the London market in a decade, Deliveroo’s IPO had been hailed by British finance minister Rishi Sunak as a “true British tech success story”.


Glencore, a British business founded in 2013, showed that it could prosper without an overseas New York IPO. Eight years later, a successful Deliveroo IPO could have incentivised more public offerings by technology companies on the London market. Its sharp £2.38B fall may undermine the UK’s financial ambitions.