Despite Amazon-backed Deliveroo flaunting a high valuation ahead of its IPO, the reality has been much grimmer. Almost immediately, the shares dropped by 31 percent. The fall was so hard and fast that the London Stock Exchange actually halted trading for a brief period of time.
What's behind Deliveroo's seemingly failed IPO? Is there still a chance for early investors?
Deliveroo stock is way in the red on its first day of trading.
A full five hours ahead of New York, London is already in the throes of the trading day on March 31. For the U.K.-based food delivery operation (reminiscent of GrubHub), this isn't a good thing. Deliveroo was counting on capitalization, but the IPO has lost about $3.2 billion in valuation.
Because of the insane plunge, Deliveroo is on track to deliver not takeout food, but the worst IPO in London's history. This all occurred after Deliveroo came out on the other end of antitrust claims due to Amazon's 16 percent stake (these claims were dropped to help keep the economy afloat during the COVID-19 pandemic).
Gig economy labor laws might be at the crux of the matter.
“We will not be taking part in the Deliveroo IPO as we are concerned about the sustainability of the business model, including but not limited to its employment practices, and also the broader governance of the business” - Andrew Millington, Head of UK Equities, Aberdeen Standard— Joel Hills (@ITVJoel) March 24, 2021
What happened to the Deliveroo IPO that caused such a swift plunge in its share price? Like the U.S., the U.K. is questioning the validity of the gig economy through labor regulations. While Americans have something called the Pro Act on the table—which could put upwards of a third of workers at risk under the guise of union protection—the U.K. is considering similar regulations that would supposedly protect gig economy workers from large corporations.
Because the majority of the company's business model is rooted in the gig economy, investors seem perturbed by the notion of a Deliveroo investment. Under new U.K. regulations, Deliveroo would be required to contribute paid leave and pensions. For a company that has yet to achieve profit, this is a huge red flag.
Recently, Uber had to reclassify its U.K. ride-share drivers as employees rather than independent contractors. The reality of a shift for the gig economy landscape is likely.
A bad look for the London Stock Exchange
The London Stock Exchange has been working hard to invite big listings, which is probably part of the reason why Deliveroo's past antitrust concerns got swept under the table. This is a setback for the exchange too, which was hoping to invite more high-value tech offerings rather than seeing them all go to New York's Nasdaq Exchange. For the Deliveroo IPO that was proposed to be worth $2.1 billion, this is a big loss for more than just the company—and the impact could be lasting.
The reality of IPO volatility, as evidenced by Deliveroo
Deliveroo currently down -30%, IPO price was 390p and its trading at 280p right now :/— Otunba LDN (@antbase10) March 31, 2021
Investing in IPO-price stocks poses more risk than regular shares. If anything, Deliveroo is a reminder for investors to be cautious of public offerings. Just because you're eligible to invest in them as a preferred investor doesn't mean you have to pick every public offering that comes your way. Only time will tell if early Deliveroo investors will get back to their cost basis.