Deliveroo IPO Fail
Deliveroo becomes ‘worst IPO in London’s history’
What is an IPO?
An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors.
Deliveroo Holdings Plc (ROO.L) collapsed in its London public debut as investors abandoned the food-delivery start-up criticized for its labour practices and corporate governance.
When Deliveroo selected London for its anticipated IPO, the food delivery company was praised as being “a true British tech success story” by the U.K. Finance Minister Rishi Sunak.
Deliveroo’s 1.5 billion-pound ($2.1 billion) IPO was meant to be a triumph for the City in its post-Brexit push to lure tech firms away from New York.
However, the Amazon-backed company failed to deliver on its first day of trading (Wednesday). Shares plunged drastically as the markets opened, with investors questioning Deliveroo’s ability to generate profits and an extravagant £7.6 billion ($10.5 billion) valuation. The stock was now trading at approximately £2.86 ($3.94), 27% below the price at which the shares listed. This put Deliveroo on track for the worst London debut for a major IPO.
The 70,000 retail investors are amongst the losers in the IPO. They were given the opportunity to purchase shares via the Deliveroo’s app. Deliveroo attempted to persuade its customers in the U.K. to purchase £50 million worth of shares in the IPO. However, they are restricted until April 7 to sell their shares.
“Deliveroo is choosing to price responsibly within the initial range and at an entry point that maximises long-term value for our new institutional and retail investors,” the company said.
However, individually as a company Deliveroo has been facing a continuous dilemma surrounding how it pays its employees (drivers). This is a story that potentially will not disappear promptly. Sources have claimed on several occasions that these negative stories regarding the labour issues have not impacted the company in the lead-up to the IPO. Although, some sources have suggested that the large institutional investors have refused to participate in the offering. Yesterday’s activity in the market is an indication of what the real impact has been.
IPO Details
Deliveroo and investors sold £384.6 shares at the offer price, equal to a 21% stake. The company raised £1bn, while shareholders including Amazon.com Inc. and Shu, the founder, sold the remaining £500M of stock.
Goldman and JPMorgan were joint global coordinators on Deliveroo’s IPO, while Bank of America Corp., Citigroup Inc., Jefferies and Numis Securities Ltd. acted as bookrunners.
Was Deliveroo mispriced?
The offer price is at the lowest end of Deliveroo’s pricing range after various fund managers conveyed that they would not take part in the deal due to concerns surrounding the firm’s economics.
Additionally, concerns surrounding the working conditions of Deliveroo’s riders has been highlighted as one of the main reasons for investors disinterest.
Regardless of the revised valuation of £7.6bn, there has been worries about the firm because it has not yet made a profit — it is still overvalued.
It reflects the fact that even pricing the IPO at the bottom of the range, Deliveroo was demanding too high a price tag for a loss-making delivery platform in a very competitive space with a questionable path to profitability. The books were covered, it was just plain mis-priced.
Chief Markets analyst at Market.com
Many of Deliveroo’s advisers, bankers and investors were abrupt to blame short sellers for the opening plunge. “At least three hedge funds have very actively gone short on ROO.L, enabled by banks outside of the syndicate,” said an individual directly working on the deal. “The opening move was very sharp.”
References:
- Bloomberg
- Financial Times
- Yahoo Finance
