Does Deliveroo's IPO Tanking 30 Percent Mean End of Gig Work Model?

Deliveroo's 30% stock price collapse the day after its IPO reflects the financial impact of court rulings in the US and UK which have undermined the gig worker business model increasingly viewed as unprofitable and exploitative. 

This is less a moral judgement on the part of investors (heaven forfend...) than a realization that the broader assault on tech domination and specific objections to gig economy dependence on an underpaid workforce may mean expectations about profitability have to be reassessed. Reputational risk adds to the perceived cost as well as to questions about such companies' long-term financial viability.  JL

Shalini Nagarajan and Shona Ghosh report in Business Insider:

Analysts say its IPO took a turn for the worse when multiple fund managers said they wouldn't back the business due to concerns about working practices."It reflects the cautious approach big funds have shown to the stock amid concerns about working practices and governance, citing Deliveroo's lack of profitability, and the reputational and financial risk posed by its gig-economy contractors rather than workers entitled to a minimum wage. "Exploitation of its workers is one of the main reasons behind its sour start." The IWGB, a British union representing gig workers is organizing a strike of Deliveroo riders on April 7, when unconditional trading begins.  "Deliveroo has gone from hero to zero."

Deliveroo fell as much as 30% in the food delivery-startup's public trading debut on Wednesday, marking a downbeat start to the biggest initial public offering in London in a decade.

The company's shares were trading at an intraday low of 271 pence ($3.78) per share, lower than the offering price of 390 pence ($5.35). The price recovered to 313 pence ($4.31) at 8:45 a.m. London time.

"Deliveroo has gone from hero to zero as the much-hyped stock market debut falls flat on its face," said AJ Bell investment director Russ Mould. "It had better get used to the nickname 'Flopperoo'." 

The UK-based company had priced 384.6 million shares at 390 pence per share, the bottom of its marketed range between 390 pence and 410 pence ($5.65), hoping to target a valuation of 7.6 billion pounds ($10.5 billion). But it's the first of London's top five deals this year that wasn't able to open at its highest targeted valuation, shedding more than 2 billion pounds ($2.7 billion) in market value on its trading debut.

Analysts say its IPO took a turn for the worse when multiple fund managers said they wouldn't back the business due to concerns about working practices, spooking many that applied for its shares and possibly racing to dump them.

"It reflects the cautious approach big funds have shown to the stock amid concerns about working practices and governance," said Neil Wilson, chief market analyst at Markets.com. "A lot of the big UK funds are not on side, which was failure number one."

Amazon-backed Deliveroo, which trades on the London Stock Exchange under the ticker symbol ROO, raised 1.5 billion pounds ($2.1 billion) via proceeds from investors. It could have raised 1.77 billion pounds ($2.4 billion) had the company priced its shares at the higher end of its IPO range. But its offering was priced at the lower end because of a drop in shares for food-service firms such as JustEat and Delivery Hero on Monday, the Wall Street Journal reported, citing a spokesperson.

The company grew to the point of launching on the stock market partly thanks to the exploitation of its workers, said Connor Campbell, a financial analyst at SpreadEx. "Now, said exploitation is one of the main reasons behind its sour start to life as a public company," he said.

It approached its market debut uniquely compared to other IPOs. Only institutional investors are able to participate in Deliveroo's market debut on March 31, but private investors buying into its 50 million pounds ($68.6 billion) community offer can participate once unconditional trading begins on April 7. 

Deliveroo was founded in 2013 by former banker Will Shu and his childhood friend Greg Orlowski. The British firm offers food, groceries, and alcohol for delivery on demand via an app, and ferries goods out to consumers through a network of gig-economy riders.

Its IPO will be a test for the UK tech startup industry, where valuations for unprofitable, high-growth companies have become increasingly bullish, even as public investor appetite for riskier businesses remains largely untested.

The company faces stiff competition in the sector from direct rivals Uber Eats and Just Eat, plus niche grocery delivery apps such as Gorillas, Getir, and Weezy.

Deliveroo primarily makes money by charging its restaurant and grocery partners a commission on each order, up to 35% in some cases. Though hoping to permanently benefit from an uplift in takeaway orders during the pandemic, the firm remains loss-making.

The firm reported a £225.5 million ($311 million) pre-tax loss for the full-year 2020, a narrower loss than the £317.7 million ($438 million) it lost in 2019. Revenues were up 54% to £1.1 billion ($1.5 billion) from 2019.

Other revenue streams include its subscription programme for regular consumers who want lower delivery fees; food procurement deals; licensing out its "Editions" dark kitchens to restaurant brands; and its "Signature" marketing platform.

Its listing is also closely watched thanks to its dual-class share structure, which sees Shu retain control over the firm in a model similar to US listings. The CEO will be granted 20 votes per share, while other shareholders will receive one vote per share.

The IPO is set to make Shu a wealthy man, since he plans to sell approximately $36 million in shares, leaving him with a stake in the company worth around $662 million.

While Deliveroo has indicated that demand from institutional investors exceeded supply in the run-up to its IPO, a number of big firms publicly stated they would not back the company.

Aviva, Rathbones, Legal & General, and others variously cited Deliveroo's lack of profitability, and the reputational and financial risk posed by the fact its riders are gig-economy contractors rather than workers entitled to a minimum wage.

That comes after the Supreme Court ruled in February that ride-hailing giant Uber needed to reclassify its drivers, also deemed contractors, as workers and pay them holiday pay and a minimum wage.

The IWGB, a British union representing gig economy workers, said it was organizing a strike of Deliveroo riders on April 7, when unconditional trading begins.

Goldman Sachs and JPMorgan are joint global coordinators on Deliveroo's IPO, while Bank of America, Citigroup, Jefferies, and Numis Securities are join bookrunners.

Insider breaks down everything investors need to know about Deliveroo's IPO — from its dual class structure to who's making money and who's shunning it.