Shares in Deliveroo fell dropped 30% on the day of its London IPO, wiping about £2.3 billion off its value.
Questions about the company’s business model and prospects in a competitive environment ruined its stock market debut. Deliveroo has yet to turn a profit, and some investors are concerned that the pandemic boom in food delivery will fade when restaurants reopen. Pressure is also building for delivery riders to be offered better terms and conditions. As of mid-April, the stock price was trading near 2.5 pounds or 35%below the price at which the shares listed, putting it on track for the worst London investment debut for a major IPO.
The Initial IPO Prices
Deliveroo had set the IPO price at £3.90 per share, the bottom of the range it was targeting, despite the company’s expectations that it has lots of interest in its business. Amazon backs the company, and at the IPO price, the company was valued at 7.6 billion pounds, making it the largest IPO since the Glencore group in 201. Amazon owns 16% of Deliveroo, and JP Morgan Chase and Goldman Sachs were the lead investment bankers on the IPO’s underwriting.
Issues With the Business Model
There appear to be several large institutional investors that said that they would not participate in Deliveroo’s IPO because they had concerns about competition and regulation and the way the company treats its delivery riders. Ahead of the IPO, the U.K. Supreme Court upheld a ruling that Uber drivers should be classified as workers and not independent contractors, entitling them to minimum wage, paid vacation time, and a pension. The highest court ruling prompted Uber to reclassify its drivers, but not its food delivery couriers as workers, and could force other gig economy companies to rethink how they operate. If forced to offer more traditional employee benefits, like company pension contributions, Deliveroo’s already thin margins would struggle to climb.
Deliveroo faces significant pressure from the market leader, Just Eat Takeaway. There is heavy competition to improve restaurant coverage and the delivery position in the most heavily populated areas. Gaining market share while trying to show profitability to investors is not an easy task, and that is why the price of the shares is facing downward pressure. In addition to the revenue concerns related to employee benefits, investors see problems arising as the lockdown eases and customers return to restaurants generating further competition.
Deliveroo offered a dual share system on its IPO. Current rules do not permit dual-class share structures on the premium segment of the London Stock Exchange. Companies listed on the premium segment qualify for inclusion in indexes such as the FTSE 100. By opting for this dual-class share process, funds that invest directly into the FTSE 100 will not be able to purchase Deliveroo. Dual-class share structures are a common feature of listed technology companies in the United States. Still, some British investors are frowned on as they can give executives outsized influence on shareholder votes.
Concern About Tech Shares Listing in the U.K.
The poor results of the IPO have generated some concern. Investment banks try their hardest to keep the stock price above the IPO price, especially on the first trading day. A 27% decline, followed by subsequent declines, reflects poorly on the investment banks. This scenario will likely put a hold on additional technology IPO’s listed in the U.K. due to the failure of Deliveroo to hold its IPO price. Large investment banks such as JP Morgan and Goldman Sachs are unlikely to put their reputation at risk on other technology firms following this disastrous IPO.
The Bottom Line
The IPO of Deliveroo was doomed from the get-go. The dual share structure and the issues related to employee compensation and benefits do not float well in the U.K. The recent ruling by the U.K. Supreme Court shines the spotlight on how delivery drivers could be compensated. If Deliveroo needs to pay delivery drivers like employees, it erodes their business model. This concern is reflected in their stock price. There is also concern that when consumers return to restaurants, the delivery services will no longer be in vogue, and their profit margins will shrink. The dual-class share structure, which is popular for technology shares, has eliminated Deliveroo from the premium share category. The share price’s poor performance in the wake of the IPO is likely to keep other investment banks on the sidelines and away from underwriting IPO’s for technology shares in the U.K.
Author: Umesh Kumar Keshri
Umesh is a Director of the strategy, PR consultant and Founder of B2B TIMES and B2B TRIBUNE. He has over 6 years’ experience in marketing at companies ranging in size from start-ups to a Fortune 50 company. He really enjoys writing about himself in the third person.