Deliveroo Flops on London Stock Market After Investors Balk at £7 Billion Valuation

Deliveroo’s feted multibillion pound debut on the London Stock Exchange (LSE) flopped this morning, 31 March. Its share price dropped by 30 percent at one stage, wiping over £2 billion off its £7.6 billion target value. It had already reduced its opening valuation down from £8.8 billion, after numerous large U.K. investors expressed concerns over the connection between its riders’ rights and the company’s route to sustained profitability, and the Bureau of Investigative Journalism found some riders earn as little as £2 per hour. Founder and chief executive Will Shu — whose shares give him 20 times the voting rights of other investors — said:

I am very proud that Deliveroo is going public in London - our home.

As we reach this milestone I want to thank everyone who has helped to build Deliveroo into the company it is today - in particular our restaurants and grocers, riders and customers.

In this next phase of our journey as a public company we will continue to invest in the innovations that help restaurants and grocers to grow their businesses, to bring customers more choice than ever before, and to provide riders with more work.

What is Deliveroo’s stock market debut?

The so-called float, or initial public offering (IPO) involves Deliveroo offering shares to investors outside the company, including the general public. Deliveroo sets a price per share, which is expressed in pence (so, 100p instead of £1.00) and investors decide whether they are willing to pay it. Trading is currently “conditional,” but will become “unconditional” on 7 April, when it is open to “retail investors” — people who want to put money into Deliveroo but don’t invest for a living.

What was Deliveroo’s share price expected to be?

Deliveroo initially wanted to set the price around 460p, but reduced that to 390p. In turn, that reduced its target valuation from around £8.8 billion to £7.6 billion.

What exactly happened to Deliveroo’s share price today?

The company offered shares at 390p. They opened at 331p, and plummeted as low as 275p. Because the company’s valuation is linked to the share price, that plummet reduced it to as low as £5.3 billion. The shares then recovered to around 298p, and will continue to fluctuate.

Why did Deliveroo’s share price flop?

A combination of factors.

1. It was “overpriced” — indeed Deliveroo dropped its own valuation by £1 billion on the eve of its public listing. For a company that was loss-making, hindsight now says that a £7 billion valuation was a touch hubristic, even with the classic eternal promise of tech-company future profitability.
2. Second — and arguably more significantly — is the timing of the floatation: Investors are nervous about Deliveroo’s very route to profitability in the wake of the recent Supreme Court ruling, which saw Uber drivers classified as workers. It is a ruling which does not yet directly impact the food delivery sector, but one which is expected to have far-reaching and profound ramifications on the future of the so-called gig economy. Investors are nervous that if Deliveroo is not able to rely on the inexpensive contractor status / exploitation of its riders in the long-term then its costs are going to increase and its route to profitability becomes severely compromised.
3. Deliveroo’s profitability — which quickly became a £224 million loss when 2020 closed out — came about largely because of an unprecedented global pandemic which changed socioeconomic habits overnight. Other food delivery companies — like Doordash in the U.S. — are also seeing share prices fall as vaccines promise economic reopening.
4. Put these three factors together: overpriced, compromised profitability, and disadvantageous economic conditions, and it’s not hard to see why it flopped.

What does this mean for Deliveroo?

Initially: Less money and some embarrassment. Longer-term: Probably not all that much.

Its float was so hyped that such a flop — described by Reuters as “torrid” — will sting, but it’s still raised £1 billion in capital for future investment in a day. But now the terms are set: Investors are concerned about workers’ rights and their connection to profitability, and so they are reluctant to meet the price Deliveroo wants.

What does this mean for food delivery in the U.K.?

It’s tough to ascribe specific consequences on day one, but it’s clear that the Supreme Court’s Uber ruling is weighing heavily on investors’ perception of food delivery. Equity analyst Sophie-Lund Yates told Bloomberg that, “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.”

This is a double-edged sword. Investor discontent is one of the surest ways to ensure reform, because money is still what talks; it also shows that any scruples over investing in a company that refuses to provide basic employment rights in order to be profitable aren’t moral ones. If Deliveroo is able to continually grow without changing its model, it may be able to continue to survive at a loss. With riders’ strikes still to come, pressure on the company is set to increase before trading opens up to retail investors on 7 April. If Deliveroo reclassified its riders as workers then it would be a game-changing model for the food delivery economy — rival Just Eat has already offered contracts to a proportion of its riders — and give its couriers basic security.

But to do that it would have to accept increased costs, which would thin its margins further and add a different kind of concern for investors. Shooting for a £7.6 billion valuation while already making a loss suggests that is not on its priority list.