Commercial Awareness Update 13th February by Ben Triggs

1. Brexit bill through the Commons

Last week the Brexit Bill passed through the House of Commons without amends, as 498 MPs voted to give the government the authority to trigger Article 50, with only 114 voting against. The Labour Party and other opposition MPs proposed multiple amendments to the bill, but were unable to gain enough support to change the bill. These included:

• One amendment would have forced Theresa May to give a report back to Parliament every two months – this was defeated by 333 to 284 votes
• Another amendment called for leaders of the devolved administrations to be consulted on any final Brexit deal – again 333 MPs voted against this compared to 276 for.

What happens next?

The bill continued to the House of Lords, where it will be debated and potentially amended. As an unelected institution, the Lords cannot reject the legislation but can recommend amendments to the bill – in this case the House of Commons will be called on again to debate the proposed amendments. Debates start on 20th February and are expected to continue into March. Many commentators suggest the House of Lords will push for amends, which would almost certainly delay Theresa May’s plan to trigger Article 50 by April. However, a Government source warned the House of Lords ‘faces abolition if they block Brexit’ – urging them to deliver the will of the British people.

In other Brexit news, it’s been reported that Chief EU negotiator Michel Barnier is set to demand £48 billion from the UK to leave the EU. The payment is to cover spending the UK has already committed to EU projects up until 2020 and to fund the pensions of officials. Several figures in the EU have suggested that a trade deal cannot be negotiated until a ‘divorce' settlement has been reached. 

Questions to ask yourself… After the public voted for Brexit, should the unelected House of Lords recommend amendments to the Brexit bill? Could the negotiations over the ‘divorce' settlement cause problems for future trade deals with the EU?

2. Snapchat's IPO

After huge speculation, Snapchat’s parent company Snap Inc. confirmed it would be publically floated on the New York Stock Exchange (NYSE). The social media app is expected to be valued at approximately $25 billion and aims to raise $3 billion funding from the IPO. The high valuation doesn’t mean they are making a profit. In 2016, Snap’s revenue was $404 million, but it posted a net loss of $514 million. The valuation is largely based on the potential for large profits  – Snapchat has 158 million daily active users, with an average user going on the app 18 times per day.

CEO Evan Spiegel and co-founder and CTO Robert Murphy have total control of the business, which means they won’t give current shareholders a vote on the public offering – the first time a stock will be made public without consultation of this form. The complete control the founders enjoy is considered a risk by many investment managers.

Could Snapchat go the same way as Twitter?

Last week, Snap’s rival Twitter announced a $167 million loss in the last three months of 2016. Twitter had 319 million active users in the quarter – up 4% compared to the previous year – but their losses almost doubled. On Thursday, the social media giant’s share price dropped 12% as a result of these new figures. It was believed Donald Trump’s use of Twitter and the publicity surrounding this would lead to a financial boost, but this didn’t materialise.

In November 2013, Twitter floated on the stock exchange with shares being offered at $26. On the day it went public, Twitter ended trading at $44.94, but after this latest announcement, shares are trading below $16 per share. Twitter’s strategy for making profit has failed thus far and with a declining user base, this is unlikely to change anytime soon. Snap inc. is growing rapidly at the moment, but staying relevant and a clear strategy for revenue generation is required to avoid a similar outcome.

Questions to ask yourself… How can Snap Inc. become profitable? What are the advantages of floating on the stock exchange? Why do some consider the total control enjoyed by Snap Inc. founders a potential problem?

3. Co-op bank is up for sale

The Co-operative Bank has put itself up for sale, aiming to attract a buyer to acquire all of the company's shares. The bank was bailed out by US hedge funds after almost collapsing in 2013, and has struggled to boost revenues since, due to low interest rates. A merger with Britannia Building Society around the time of the financial crisis caused major problems and in 2013 the bank announced a £1.5 billion black hole in its accounts. To save the bank from collapsing, lenders wrote off their debt in return for part ownership of the bank (a debt for equity swap). 

Co-op Bank hasn’t managed a return to profitability since 2013 and expects to make a loss this year, making it an unattractive prospect for many potential buyers. However, it has loyal 4 million customer base and has been championed for creating a distinct ethical brand within the market. TSB has been tipped as a potential buying and have stated they would consider the acquisition at the right price. After separating from Lloyds, TSB doesn’t have the scale needed to challenge the Big Five commercial banks – merging with Co-op Bank would give them a much larger market share.

Questions to ask yourself… Given its lack of profitability, would acquiring Co-op Bank be a smart move for TSB? Why is TSB’s lack of market share an issue?

4. The recalculation of business rates

CEOs of high street giants have warned many popular high streets will lose shops, restaurants and pubs due to the recalculation in business due to take effect in April. Business rates are charged on almost all non-domestic properties in proportion to the property value – Chancellor Philip Hammond commissioned an update to account for changes in property value since business rates were last set seven years ago. The new “rateable values” will have a dramatic impact on small and large businesses, especially in areas of London and the South East where property values have soared. For instance, Westfields in Shepherds Bush will see a 102% increase. In other areas of the country, rates will go down as commercial property prices have decreased. 

A transition arrangement proposed by the Government will limit the annual increase in the first year, but owners of Pizza Express, Greene King Pubs, Wagamama and many other chains have written to Hammond asking him to reconsider the increase.

Question to ask yourself… Should the government be charging higher rates on successful high streets, while the retail sector is already struggling?

Commercial Awareness Blog 7th February by Ben Triggs

1. Revised Bank of England growth forecast

Last week it was announced the Bank of England has revised its economic forecast for 2017 and now expect the economy to grow 2% - up from the previous prediction of 1.4%. The central bank has also forecasted lower unemployment and a slightly less sharp increase in inflation for the year ahead, as they react to further signs the public and business is dealing well with the impact of the Brexit vote. Despite this revised forecast, leaders of big firms believe Brexit is ‘already damaging business’. In a survey of senior executives from over 100 of the largest 500 companies in the UK, 58% felt the referendum was having a negative impact on their business.

In a rate setting meeting at the Bank of England, it was decided interest rates will be held at 0.25% and a programme of quantitative easing would continue. Quantitative easing is a process of creating money electronically, for the purpose of buying financial assets and inject capital into the economy. The Bank of England has committed to giving a further £20.7 billion to lenders, who have had profits cut by continued low interest rates. Regardless of the positive signs for the UK economy, it is unlikely the UK will see interest rate rises in the near future.

Questions to ask yourself… How will the markets react when the Government triggers Article 50? What are the potential problems of Quantitative Easing?

2. Tesco’s planned Booker takeover

Tesco stunned the grocery sector in January by announcing a plan to acquire wholesaler Booker in a £3.7 billion deal. The takeover has run into problems lately as the supermarket giant is struggling to convince the Competition and Markets Authority the deal is in the best interest of the customer. Booker is a cash-and-carry wholesaler supplying independent retailers and also owns the Londis, Budgens and Premier brands – shops which are independently owned but run as franchises. The deal would add 5,400 shops to Tesco’s network of small stores, but this could lead to Tesco having too much control of the grocery market in some areas. 

Analysts suggest Tesco may be forced to sell over 600 stores nationwide, which are situated less than 500 metres from a Booker owned store. However, Tesco’s suggest Booker’s franchise network operates independently, playing down the potential problem surrounding competition. Lawyers from Freshfields Bruckhaus Deringer and Clifford Chance have been enlisted to provide expertise on the takeover.

Tesco owns 28.3% of the total grocery market in the UK and the Booker takeover could add a further 2% to this share. According to analysts at Bank of America Merrill Lynch, this deal could trigger a merger between Sainsbury and Morrison.

Questions to ask yourself… Will this takeover have a negative impact for consumers? Could the takeover cause problems for small shop owners?

3. Apple and Facebook post strong results

Facebook has announced another very strong quarter of revenue and profit, as they again beat Wall Street expectations in Q4 of 2016. The social media firm earnt $8.81 billion in revenue – a 51% YoY growth - and profits reached $3.57 billion. Facebook’s ‘stickiness’ and continuing growing is defying expectation, with 1.86 billion active users on the social network last quarter (a 3.9% increase compared to the previous quarter).

It was also an excellent quarter for Apple, as huge iPhone 7 sales over Christmas marked its strongest ever quarter. Their net sales in Q4 were up 3% compared to the previous year, which was helped by record revenues in their Mac and Apple Watch division as well. In 2016, Apple had experienced three quarters of declining revenue, so these figures were a welcome improvement for the tech giants.

Despite strong iPhone sales, Apple last week was overtaken as the world’s most valuable brand by Google, after five years at the top spot. Analysts calculate the brand-worth in the top company each year as part of the Global 5000 rankings. In the report, Lego took over Disney as the world’s most powerful brand. The biggest losers in the ranking were fast food chains, as they struggle to break their association with unhealthy eating.

Questions to ask yourself… Has Apple just experienced a Christmas boost or is this growth set to stay? 

4. Trump to roll back regulation

Last week Donald Trump started the process of scaling back financial regulation by ordering a review into the 2010 Dodd-Frank act. One of Trump’s key election pledges was to roll back what he believes is excessive government intervention in finance.

What is the Dodd-Frank act?

Named after the Congressmen who campaigned for the act, it was created to rein in risky practices by banks and other financial companies, while ensuring the customer was given a fair deal. Its primary aim is to prevent another financial crisis like in 2008-09. The law reduced banks dependence on debt and made them create blueprints for handling future crises. It also led to the creation of the Financial Stability Council and the Consumer Financial Protection Bureau – the latter promotes higher levels of consumer protection.

Is deregulation a good thing?

Trump’s administration suggest the legislation has failed to achieve its goals and has hurt community banks, who have struggled to comply with a number of the new laws. They believe banks will now have better ability to set prices more efficiently, therefore benefitting the customer. Wall Street reacted positively to news of the review, with increases to the share price of leading bank – Goldman Sachs rose by 4%. However, many commentators are apprehensive about deregulation, as it increases the ‘too big to fail’ thinking returning, which prevented the finance sector forecasting the 2008 crisis.

Questions to ask yourself…  Could deregulation be a positive thing for customers? Which sectors could be disadvantaged from less financial regulation?

5. Vegetable rations in supermarkets

Supermarkets have set limits on sales of iceberg lettuce and broccoli, after a harvest drought caused by poor weather in southern Spain. Tesco has stopped customers buying more than three iceberg lettuces, while you can’t buy more than three broccolis from Morrison. The aim is to restrict larger buyers, such as restaurants and caterers, so regular customers don’t lose out. Approximately 80% of the UK’s vegetables comes from southern Spain and the bad weather across mainland Europe has also affected contingency supplies from Greece and Italy.

Leading supermarkets are trying to boost supply by importing vegetables from America. However, this will cost significantly more and is likely to lead to increased prices for the customer. It’s reported that Tesco icebergs now cost 79p, up from 50p.

Question to ask yourself… Is the UK too reliant on foreign imports? 

6. And finally... £1 million prize for engineers who made the selfie possible

The four engineers who created the technology which made the selfie possible have been awarded with the £1 million Queen Elizabeth Prize – the world’s top award for engineering innovation. Working in USA and Japan over many decades, they developed the imaging sensor technology used in all digital cameras and smartphones today. Their work made most film based photography redundant and made Skyping, instant digital photography and streaming digital films possible.

Question to ask yourself… How much impact has this invention had to the modern world?