Shares in Deliveroo fell as much as 30% in its highly anticipated London IPO on Wednesday, wiping about £2.3 billion ($3.2 billion) off the company's value, and dealing a blow to the city's renewed efforts to attract tech company listings.
The stock was last trading at around £2.86 ($3.94), about 27% below the price at which the shares listed, putting it on track for the worst London debut for a major IPO, according to data provider Dealogic.
Deliveroo had set the IPO price at £3.90 ($5.36) per share, the bottom of the range it was targeting, despite saying earlier this week that it had "very significant demand from institutions across the globe."
At that price, the Amazon-backed food delivery app was valued at £7.6 billion ($10.5 billion), making it the biggest company to go public in London since mining group Glencore in 2011, Dealogic said. Amazon owns 16% of Deliveroo after its investment was cleared by UK antitrust regulators last year. JPMorgan Chase and Goldman Sachs were the lead investment banking advisers on the IPO.
Questions about the company's business model and future 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.
"If forced to offer more traditional employee benefits, like company pension contributions, Deliveroo's already thin margins would struggle to climb, and the road to profitability would look very tough indeed," said Sophie Lund-Yates, an equity analyst at Hargreaves-Lansdown.
Several large institutional investors, including Aberdeen and BMO Global Asset Management, said last week 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.
The UK Supreme Court upheld a ruling last month that Uber drivers should be classified as workers, and not independent contractors, entitling them to minimum wage, paid vacation time and a pension. The 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.
"Deliveroo faces significant pressure from the market leader, Just Eat Takeaway, which is investing heavily to improve its restaurant coverage and delivery proposition, through an 'employed rider' model," Philip Webster, director of global equities at BMO Global Asset Management, said in a statement.
"We also see headwinds to Deliveroo's revenue growth as we exit lockdown and customers return to dining out in restaurants. These revenue risks are further compounded by the issues around workers' rights and a potential regulatory change, which would hamper its path to profitability," Webster added.
Deliveroo's strengths lie in its superior restaurant options and personalized app content, said Lund-Yates. The company plans to use the £1 billion ($1.4 billion) it raised from the IPO to fund expansion in areas such as "dark kitchens," which provide restaurants with an alternative space from which to prepare and deliver food. It could also use the cash for acquisitions.
Deliveroo said earlier this month that it would pay riders bonuses of up to £10,000 ($13,800) following its IPO, although on average eligible riders will receive about £440 ($606).
But about 70,000 retail investors who took part in the offer — buying shares worth £50 million ($68.9 million) — could be left facing steep losses. UK stock market rules mean that these investors will only be able to trade their shares from April 7.
A blow to London
Deliveroo's disastrous debut could set back London's renewed push to lure tech listings. The city lost its crown as Europe's largest share trading center to Amsterdam this year. Brexit has forced banks to relocate some activity away from London, putting its undisputed position as the region's top financial capital at risk.
A recent review of listings led by Lord Jonathan Hill, a former European finance commissioner, recommended that UK regulators overhaul stock market rules to allow entrepreneurs to keep control of their companies and list less stock when they go public.
Current rules do not permit dual class share structures — the kind Deliveroo has adopted — 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.
A separate review made similar recommendations for financial technology company IPOs.
While UK regulators have yet to adopt any rule changes, finance minister Rishi Sunak has welcomed the proposed reforms, saying earlier this month that they would secure Britain's reputation "at the front of global financial services."
Sunak had described Deliveroo as a "true British tech success story" ahead of the listing. Asked by broadcaster ITV on Wednesday if he felt embarrassed for endorsing the company, he said: "Gosh, no ... 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."
Sunak pointed to Facebook's rocky start after it first went public. "And then obviously we all know what happened after that," he added.
Facebook fell more than 50% in the months following its IPO in May 2012. The stock has since climbed 1,560%.