Disappointing delivery; Deliveroo stock remains 30% below offer price

The much-anticipated stock market listing of Deliveroo started badly as almost £2.3bn was wiped from the value of the food delivery app as its shares fell nearly 30% in its first day of trading – writes Christian Leeming

 
The 70,000 of its customers who bought £50m worth of shares cannot do anything as it is currently in a conditional dealing period

Many IPOs are closed to small investors, and where there is strong retail demand, coveted shares often rise in value following a floatation as retail investors buy in the secondary market.

However,  Deliveroo opened the float to its six-million UK customers and large numbers of users of the bought allocations ranging between £250 and £1,000; they are now looking at a 29% paper loss after a disappointing stock market debut, and broker PrimaryBid imposed the restriction that investors would be locked in during the usual ‘conditional trading’ period.

There had been plenty of warning signs as increasing numbers of large institutional investors declared themselves ‘out’ amid concerns about Deliveroo’s corporate governance, its treatment of its self-employed riders and its path to profitability
 

‘any backlash from customers might create a PR nightmare and put other firms off doing something similar’

Even had small investors been able to trade they would have struggled to beat the instantaneous loss as shares plummeted from the IPO price of 390p to a low of 271p on Wednesday’s open; they ended the short week at 282p.

This woeful debut is one of the worst in London on record and sparked a backlash against investment banks Goldman Sachs and JP Morgan which scooped £49m for advising on the IPO but appear to have got the valuation very wrong.

In the spirit of DIY investing, those looking at long-term wealth creation may not admit to being too exercised by such a blip, but whether a trader or embarked on a strategy to get rich slow, nobody likes to see such a hefty loss sitting in their portfolio.

As institutional investors such as asset managers and pension funds scrabble over the price, customer-investors are locked out of the process; they cannot trade their shares until the conditional dealing period ends on 7 April which represents the window between the results of the IPO being announced and the deal settling so that the shares are officially admitted to the market.

Typically lasting three days, the conditional dealing period is designed to help a new float settle, generate liquidity and create an orderly after-market; it is possible, but unlikely, that during this period, Deliveroo could actually cancel the offer.

If small investors bail out on 7 April, that could be a blow to hopes that retail investors will be allowed to buy into more IPOs in the future; Deliveroo’s offer was unusual in allowing retail investors to participate as unlike the mass privatisations in the 1980s and 90s, when the likes of British Gas were opened up to millions of Britons, privately-owned firms that come to market don’t always do so.

Russ Mould of AJ Bell told This is Money that the reasons IPOs rarely include retail investors are ‘need, greed and speed’, saying: ‘It is easier, quicker and cheaper for the advisers, syndicate of banks and the company to simply place stock with institutions – fewer, bigger orders and less admin.’

There have been increasing calls for smaller investors to be given access to IPOs and broker on this deal, PrimaryBid, says it aims to put the ‘public’ back into public markets and will soon repeat the exercise for customers of the pensions provider PensionBee.

It is a long way back for the share price, and nobody likes to see a series of gains wiped out in one fell swoop; however, if the fundamentals of the float were valid, the hitherto loss making business could climb back to territory that justifies its £3.90 valuation.

For those that had not fully appreciated the constraints on the conditional trading period, this may be either a salutary lesson, or cause for them to have participated in their first and last flotation.

However well intentioned, leveraging a customer-vendor relationship to make a financial markets transaction is complex and any backlash from customers might create a PR nightmare and put other firms off doing something similar.