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?