Watch: Amazon backed Deliveroo slumps in trading debut
When food delivery startup Deliveroo announced plans to list on the London Stock Exchange at the start of the month, UK chancellor Rishi Suank personally lauded the move.
Sunak hailed the company as a "true British tech success story" and said Deliveroo would be the first of many major tech companies to chose London.
"We are looking at reforms to encourage even more high growth, dynamic businesses to list in the UK," the chancellor said. "So it's fantastic that Deliveroo has taken this decision to list on the London Stock Exchange."
Deliveroo was meant to be the flag bearer for a new wave of tech companies coming to London thanks to stock market reforms announced in this year's budget.
Now those ambitions are in doubt after Deliveroo's disastrous IPO. Shares sunk 30% in the minutes after trading began on the company's first day of dealing on Wednesday. The slump was the worst opening day performance of a major listing in years.
"On one side, you say it’s a bit of a disaster since any tech company now would think: no way London isn’t the place – the big funds are not on my side and the regulations are still not that good," said Neil Wilson, senior market analyst at Markets.com. "On the other, it could really reinforce the need for change or the City would miss out on much more."
The question many bankers and tech executives will be asking themselves is: were Deliveroo's problems a one-off or is London still less tech-friendly than New York?
"This certainly isn’t the London PR opportunity the government would have been hoping for," said Sophie Lund-Yates, a senior equity analyst at stockbroker Hargreaves Lansdown.
Deliveroo's problems were apparent from the start. Shortly after the IPO was announced several of the City of London's biggest institutional investors — including Aviva (AV.L), Aberdeen Standard Life (SLA.L) and L&G (LGEN.L) — all lined up to publicly say they would not take part in the float.
Investors were concerned about Deliveroo's treatment of delivery drivers, its persistent losses, a chunky valuation, and the IPO's structure, which gave founder William Shu continued control of the company even after listing.
"Share structure has clearly been a big issue for UK investors," said Freddy Colquhoun, investment director at JM Finn, a money manager that invests over £9bn ($12bn) of client funds.
"I think there was an assumption that what works in the US would work in the UK too and investors would be accepting of the out-sized voting influence of Shu. This, coupled with concerns over regulatory pressures coming [and] the timing of the IPO just as we unlock restrictions, meant that a toppy valuation for a loss making business was not flavour of the day."
Like many others institutions, JM Finn avoided Deliveroo's listing.
Bankers cut the proposed value of the business by £1bn ahead of the float but the price cut wasn't enough to address more fundamental concerns.
Deliveroo lets freelancers book jobs to deliver food on its platform and pays per order completed. The company disclosed in its prospectus that it was involved in labour disputes in the UK, France, Spain, the Netherlands, and Italy. Governments in Australia, the Netherlands, Spain, and Italy are investigating its working arrangements.
These disclosures made worrying reading given the rising focus on ESG in the City — environmental, social, and governance factors. Concerns about a potential rise in operating costs were also heightened by Deliveroo's persistent losses. The company has lost £785m over the last three years, although revenues have grown rapidly over the same period.
"I think the market is waking up to reality," said Bill Blain, a strategist at Shard Capital. "Firms in a low margin, highly competitive, no-barriers to entry sector are unlikely to succeed – whatever the technological advantage they claim."
Some of the issues Deliveroo faced — such as regulatory pressure and the nature of the food delivery market — are relatively unique. Others — such as a hefty valuation for a loss making company and a dual-class share structure — are far more universal to the tech industry. It raises questions about whether London's investment community is ready to accept high-growth tech businesses even if rules are relaxed.
“The initial figures for Deliveroo are a bit of a setback as London was gaining momentum as a listings destination," said Manish Madhvani, co-founder and managing partner at technology investment and advisory firm GP Bullhound.
"So much great work has gone into creating unicorns companies and global household tech names, which we then eventually lose to the US markets. That is a core problem that needs addressing."
Many people are struck by the comparison with DoorDash (DASH), a US food delivery app which saw its shares surge 86% in New York after its IPO. The company lost $667m (£485m) last year on revenues of $885m. Deliveroo lost £225bn last year on revenues of £1.2bn. DoorDash is currently valued at $41bn, while Deliveroo's first day slump puts it closer to £5.5bn.
"We need to change how we perceive loss-making businesses," said Madhvani. "If we don’t do that in the UK, we will keep losing valuable businesses to the US."
Still, most in the City of London don't believe Deliveroo's flop will permanently damage London's tech ambitions.
"A lot of the fundamental jitters in this case are more company, rather than country, specific," said Lund-Yates.
At least part of Deliveroo's poor IPO performance also came down to timing. Investors attention has been shifting away from tech businesses towards companies that will benefit when economies began to reopen. Several recent US tech floats have been forced to price at the lower end of expectations and seen shares fall below their opening day price.
"Deliveroo firmly falls into the pandemic winners category, but at a time when traders are looking for value recovery plays, this doesn’t look like the most attractive proposition," said Josh Mahoney, a senior market analyst at IG.
Blain said the UK government was "damn silly" to make Deliveroo a flagship deal but predicted British investors would welcome better tech businesses with open arms.
"It remains critical that top tech firms can and will list in London – and it will happen," he said.
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