A Deliveroo cyclist in London, UK

Dinendra Haria | SOPA pictures | LightRocket | Getty Images

LONDON – Shares in UK grocery delivery start-up Deliveroo fell on its debut on Wednesday as the company faced pressure from top investors and unions over workers’ rights.

At Deliveroo, backed by Amazon, stocks on early deals were down around 30% from issue price before some losses were reduced. Shares were down 26% by the end of the market.

The company valued its shares at £ 3.90 ($ 5.36) on Tuesday, an expected market value of £ 7.59 billion, which was at the lower end of its IPO target range.

However, the company’s share price fell to £ 2.73 on Monday as the shares began conditional trading on the London Stock Exchange on Wednesday morning, wiping around £ 2 billion off its valuation. The company may still cancel the IPO and void all trades it has made until unconditional trading begins on April 7th.

Deliveroo sold 384,615,384 shares for an offer size of approximately £ 1.5 billion. Of that, £ 1 billion will go to the company itself and £ 500 million to existing shareholders, with Amazon and Will Shu, the company’s CEO and co-founder, benefiting the most.

The company’s shares were traded under the ticker “ROO” at 8:00 am London time on Wednesday. JPMorgan and Goldman Sachs topped the list, while Bank of America’s Merrill Lynch, Citi, Jefferies and Numis were also part of the syndicate. Retail investors will not be able to trade Deliveroo shares until the conditional deals end on April 7th.

Three hedge funds were short on Deliveroo on Wednesday, according to two people familiar with the matter who preferred to remain anonymous as the details were not disclosed. Short selling is a strategy in which an investor sells stocks borrowed and repurchases them in the future at a lower price. The aim is to make up the difference if the stock price falls.

Gig work concerns

Sophie Lund-Yates, a stock analyst at Hargreaves Lansdown, said Deliveroo’s price “isn’t quite as tasty as he’d hoped it would be”.

“This is not very surprising given the significant background noise that surrounds the company,” she said. “The biggest problem is the regulation of workers’ rights. Deliveroo’s flexible driver model is an important pillar of the group’s success plans.”

Deliveroo’s IPO offering is the largest in the UK since e-commerce company The Hut Group raised £ 1.88 billion in a listing last September. In terms of market cap, this is the largest IPO in London since Glencore’s initial public offering almost a decade ago. It’s also the UK’s largest tech list of all time by value, beating that of The Hut Group and Worldpay, which debuted in 2015 prior to delisting.

“I am very proud that Deliveroo is going public in London – our home,” Shu said in a statement. “As we reach this milestone, I’d like to thank everyone who has helped bring Deliveroo into today’s business – especially our restaurants and grocers, drivers and customers.”

He added, “In this next phase of our journey as a public company, we will continue to invest in the innovations that will help restaurants and grocers grow their businesses, give customers more choice than ever before and give drivers more work. Our goal is to build the definitive online food business and we look forward to the future very much. “

This is an important vote of confidence in London as the UK capital aims to attract high-growth tech companies and increase its financial clout after Brexit. UK Treasury Secretary Rishi Sunak described Deliveroo as a “real UK tech success story” when the company announced plans to be listed in London.

However, the IPO was hit by concerns about Deliveroo’s treatment of drivers, corporate governance and valuation. Legal and General, Aberdeen Standard, Aviva and M&A, which together have around £ 2.5 trillion in assets under management, avoided Deliveroo’s debut.

Each of the investment firms cited concerns about the gig economy in which Deliveroo operates. The company’s turquoise uniformed couriers have become ubiquitous in London and other cities during the coronavirus pandemic as people turned to food delivery apps for their groceries.

Some of Deliveroo’s drivers are going on strike next Wednesday once the IPO opens for retailers to protest what they see as poor working conditions and low wages. Deliveroo says it gives drivers the flexibility to work when they want, making an average of £ 13 an hour during the busiest times.

However, this has not allayed investor concerns about Deliveroo’s business model. Earlier this month, Uber classified all UK drivers as workers who were eligible for minimum wages and other benefits after the country’s Supreme Court ruled that a group of drivers should be treated as workers.

This is expected to result in higher costs for Uber – potentially as high as $ 500 million, according to Bank of America. Investors fear Deliveroo could suffer the same fate, and the company has allocated £ 112million to cover potential legal costs related to its drivers’ employment status.

Meanwhile, institutional shareholders have also raised concerns about Deliveroo’s governance. The company is listed in London with a two-class share structure that gives Shu over 50% of the voting rights.

Test for London

Deliveroo’s IPO will be a test of London’s tolerance of high-growth tech companies that are spending big bucks on large-scale growth before prioritizing profits.

It’s a mantra that gained popularity on Amazon in Silicon Valley that was initially unprofitable for a few years. Deliveroo remains heavily loss making after posting a loss of £ 223.7m in 2020.

“Deliveroo has yet to make a profit, which makes it very difficult to value on a traditional basis,” said Lund-Yates.

“But a market cap of £ 7.6 billion means the company is worth 6.4 times last year’s sales, which, despite the lower price, is well above 4.8 times rival Just Eat. This means Deliveroo is under pressure to deliver the goods or the stock price. ” will be in the line of fire. “

The company has managed to stay in the black in recent months thanks to increased demand for grocery deliveries.

However, UK investors are concerned about Deliveroo’s high valuation of £ 7.6 billion, especially at a time when vaccines are being rolled out and countries are planning to reopen their economies. DoorDash, a US rival of Deliveroo that went public last year, has a significantly larger market cap of around $ 42 billion.

Several tech companies are flocking to London to list their stocks. Trustpilot and Moonpig recently did this. A number of other companies, including Wise and Darktrace, are expected to debut later this year.

Martin Mignot, a partner at Index Ventures, one of Deliveroo’s earliest supporters, said London had the opportunity to become the go-to place for European tech listings.

“Deliveroo is a big win for the capital, but a lot more needs to be done,” he said. “Compared to US listings, European founders are still facing more traditional public market investors who are not used to supporting high-growth tech companies.”