Deliveroo? Deliver ouch! The largest London float for almost 10 years is also the most embarrassing. Shares in the food delivery group crashed 30 per cent when they started trading. Traditional long funds have delivered a painful rebuke to City reformists, as well as to Deliveroo and its investment banks.
Deliveroo epitomises the kind of business would-be deregulators want to lure to London. It is internet-based, lossmaking and reliant on gig workers. Founder Will Shu owns shares bearing more votes than the shares of ordinary investors. Tory peer Jonathan Hill wants dual-class stocks permitted for premium-listed companies.
Many traditional long funds do not. Their purchasing power has dwindled as pension funds have matured and investment has globalised. But their influence is still formidable.
Aviva, Jupiter and Legal & General publicly refused to participate in Deliveroo’s £7.6bn listing for governance reasons. They also objected to paying 6 times trailing sales for a business in a fiercely competitive market.
The other problem was that bond yields rose during deal marketing, in anticipation of interest rate increases. UK investors, ambivalent towards fast-growth tech plays in the first place, are turning towards defensive high-yield value shares instead.
Banks led by Goldman Sachs and JPMorgan then got the pricing badly wrong. It cannot have helped that Shu, confident no doubt in his dealmaking abilities, did not hire a financial adviser to give independent feedback.
The mispricing created an opening for short sellers who piled on to Deliveroo as soon as trading began. It appears the collapse was only arrested when book runners bought stock in the market. They will hope to place this at a profit later.
What investment banks cannot expect for some time is any more large floats from companies such as Deliveroo. The City has hung up a “closed for business” sign in the face of founders. Some fund managers see this as a financial victory, as well as a moral one. The valuations of ridiculous Spac companies will eventually blow up in New York, not London, they say.
It is a pity their message on standards was not delivered with greater subtlety. The diminution of the power of long funds is evident in their need to speak out publicly. In the past, they were often able to forestall disasters from behind the scenes. But the ultimate blame for this City debacle lies with Deliveroo and its advisers.
The Lex team is interested in hearing more from readers. Please tell us what you think went wrong with the Deliveroo IPO in the comments section below