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March 31, 2021

Deliveroo Holdings Plc shares plunged as much as 31%, the worst performance in decades for a big U.K. initial public offering, dealing a blow to London’s efforts to establish itself as a hub for technology listings in the wake of Brexit.

The stock dropped 23% to 299.55 pence at 9:49 a.m. in London after the 1.5 billion-pound ($2.1 billion) sale, which was priced at 390 pence, the bottom end of the initial range. Trading was halted twice for several minutes due to volatility.

The deal quickly ran aground after Deliveroo’s bankers, led by Goldman Sachs Group Inc. and JPMorgan Chase & Co., began taking orders last week. Some of the U.K.’s largest asset managers said they wouldn’t buy the stock because the company’s treatment of couriers doesn’t align with responsible investing practices. And the shares were being marketed at a time when investors have shifted away from the fast-growing companies that fared well during pandemic lockdowns.

“It’s not a great endorsement of setting IPOs in the U.K. compared to, say, the U.S., that’s for sure,” said Neil Campling, analyst at Mirabaud Securities. “Then you have the combination of poor timing, as many ‘at home’ stocks have been under pressure in recent weeks, and the well-publicized deal ‘strike’ by a number of A-list institutional investors.”

Beset by concerns about its dual-class shareholder structure and worker rights, Deliveroo is the first of London’s top five deals this year not to price at the highest targeted valuation, data compiled by Bloomberg News show. Its plunge marks the biggest opening drop for a U.K. listing in decades.

Hundreds of riders are planning a protest next week to lobby for better pay and conditions.

Rising yields on U.S. Treasuries in March triggered a rotation out of growth stocks, a category Deliveroo falls into. “The window for tech-driven IPOs just couldn’t be worse after still growth-dominated SPACs had taken a breather earlier this month,” said Oliver Scharping, a portfolio manager Bantleon AG. “Deliveroo was trying to keep the window open with brute force.”

And U.S. peer Doordash Inc. has slumped 23% this month, while European rivals Just Eat Takeaway.com NV, Delivery Hero SE and meal-kit maker HelloFresh SE have also fallen this year as the vaccine rollout raised hopes of economies reopening.

Deliveroo and investors sold 384.6 million shares at the offer price, equal to a 21% stake. The company raised 1 billion pounds, while shareholders including Amazon.com Inc. and Chief Executive Officer Will Shu sold the remaining 500 million pounds of stock. It’s the largest IPO in the U.K. since e-commerce operator THG Plc’s 1.88 billion-pound listing in September.

The prospectus indicates Amazon was looking to sell 23.3 million shares in the offering. At the IPO price, this means it could receive proceeds of 90.9 million pounds, with its remaining stake valued at about 818 million pounds, according to Bloomberg News calculations.

Lockdowns contributed to massive growth for Deliveroo and its peers. Orders on the platform grew 64% last year, but it hasn’t managed to turn that growth into full-year profit just yet. The company’s 2020 adjusted Ebitda was a loss of 11.8 million pounds, according to the prospectus, still narrower than the 226.9 million-pound loss a year earlier.

“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,” said Sophie Lund-Yates, an equity analyst at Hargreaves Lansdown Plc.

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Like THG, Deliveroo listed with weighted voting rights on the LSE’s standard segment and therefore can’t be included in indexes such as the FTSE 100, despite its size. While the stock will lose out on fund flows from passive strategies that track these benchmarks, the same situation hasn’t prevented THG’s shares from surging 26%.

Some investors balked at the dual-class structure, which will allow Shu to retain control of the business for three years. Yet, London may soon do away with the so far sacrosanct “one share, one vote” principle for premium listings, as it is one of several proposed changes to the U.K. listing rules in a bid to attract more high-growth offerings.

Deliveroo was supposed to be an important deal for the City of London, which is working hard to boost its credentials as a listing venue for tech companies that can compete with heavyweights New York and Hong Kong. Its efforts were boosted on Tuesday when homegrown unicorn Oxford Nanopore Technologies Ltd., a DNA sequencing firm, said it plans to list in London this year.

Overall, the post-Brexit charm offensive had been paying off. IPOs have now raised more than 7 billion pounds in London this year, marking the city’s best-ever first quarter, according to the data compiled by Bloomberg. Deliveroo’s market value of 7.6 billion pounds at the offering price makes it one of the U.K.’s largest traded tech companies.

If there is enough demand, underwriters have the option to sell additional shares an increase the deal size by as much as 10%.

Goldman and JPMorgan are joint global coordinators on Deliveroo’s offering, while Bank of America Corp., Citigroup Inc., Jefferies and Numis Securities Ltd. are joint bookrunners


Source: Bloomberg