Early investors face large paper losses as institutions shun UK’s biggest IPO in a decade  
Thursday 01 Apr 2021 Author: Steven Frazer

Takeaway platform Deliveroo’s (ROO) much-hyped stock market debut was a disaster as the stock plunged as trading in its shares began (31 Mar).

Having priced the IPO (initial public offering) at 390p per share, the stock opened at 330p and it only got worse from there as Deliveroo briefly dipped below 300p.

The initial reaction of investors will raise questions about the about the state of the broader stock market, investor appetite for new listings and the health of the UK economy.

It also leaves thousands of Deliveroo customers with app accounts and retail investors nursing heavy paper losses, having been offered the chance to invest up to £1,000 in the IPO.

Most readers that invested following our recent feature were probably playing a long-term game and should not panic even if we, wrongly as it turned out, didn’t anticipate such a negative response to Deliveroo’s debut.

This initial sell-off in the shares is though a hard lesson for those who hoped to achieve a quick profit by getting in at the issue price.

The company had raised £1 billion of growth funding from investors at a final valuation of £7.6 billion, London’s largest IPO in a decade, but several institutions, such as Legal & General, Aberdeen and M&G, had avoided the IPO because of questions about Deliveroo’s working practices and governance.

Among the chief concerns are the rights of its gig economy delivery riders and drivers, who are treated as private contractors and get none of the protections of employed workers, such as sick or holiday pay.

A key risk facing the business is that these arrangements would change as a result of regulation or public pressure, with material implications for its profitability.

Investors may also have been put off by the dual-class share structure that gives co-founder and chief executive Will Shu greater control over the company.

Twin-stock structures are rare in the UK but they are popular with founder-owned businesses in the US and particularly with many of the big tech IPOs in recent years.

Deliveroo is fighting for market share in a hotly contested food delivery space, with the company recently announcing expansion plans that will see its delivery riders and drivers operate in 100 more UK towns and cities this year as demand continues to surge during the various lockdowns.

Yet it continues to rack up huge losses. Deliveroo reported an underlying loss for 2020 of £223.7 million, down from £317.3 million of red ink in 2019.

There may be fears that if the company couldn’t turn a profit in the very helpful market conditions created by the pandemic then it has little chance of doing so once there is a return to some form of normality. 

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