On the eve of a much anticipated IPO, Deliveroo scales back its funding ambitions

Europe’s most hotly anticipated IPO is off to a bad start—and it hasn’t even begun trading yet.

Deliveroo, which counts Amazon as a backer, pared back its offer price on Tuesday to the bottom of the range amid investor concerns about future earnings and over the legal cloud of employee rights.

Deliveroo’s IPO will be at £3.90 per share—at the bottom of the £3.90 to £4.60 range it announced on March 22—giving Deliveroo a market capitalization of £7.6 billion ($10.4 billion).

The meal-delivery firm debuts on the London Stock Exchange on Wednesday.

Labor concerns

Deliveroo is entering an uncertain market as a vaccine-led reopening in many of its largest markets is on the horizon—which means an expected surge in in-restaurant dining that will eat into delivery orders. DoorDash in the U.S. could be a bellwether for the changing fortunes of this sector. In recent weeks, investors have punished the American meals-delivery service, sending shares down nearly 50% from its all time high, reached just last month.

But Europe, and the U.K. in particular, presents its own unique problems.

Last month, in a decision that could impact all gig economy companies in Britain, the U.K. Supreme Court ruled that Uber drivers are, in fact, employees, and that they have to be afforded the same employment protections and benefits as full-time staff, including paid leave and minimum wage. The ruling is broad enough that it could impact other firms that rely on an army of self-employed workers such as Deliveroo.

That uncertainty could keep some investors away. Legal & General Investment Management, the U.K.’s biggest fund manager, has already bowed out of the Deliveroo IPO, citing “ESG concerns.”

“This finding may well apply to takeaway home delivery too, driving up their costs,” Professor John Colley, Associate Dean of Warwick Business School and an expert on tech firm IPOs said in an emailed statement.

“Ultimately Deliveroo will have to charge customers and restaurants far more to make a profit, but that brings its own difficulties. For restaurants, margins are already narrow. And at what price do customers simply decide to collect their own meals?”

Deliveroo has yet to turn a profit, reporting a £223.7 million ($309 million) loss last year. It operates in a dozen markets, including six in the eurozone where competition is fierce for “to your door” food-delivery services.

Deliveroo’s London listing will take the form of a dual structure in the first three years before reverting to a traditional structure, giving Deliveroo CEO William Shu the ability to make company decisions easily in the initial period.

The dual-structure IPO will create two separate classes of shares with different voting rights, commonplace in exchanges in the U.S., Hong Kong, and the EU, but less so in the U.K. In the first three years, Deliveroo will not be eligible for inclusion in FTSE indexes because of this structure.

Deliveroo said the IPO has found good demand, adding that 30% of deal will be reserved for three anchor investors which it did not name.