Category Archives: Current Affairs

“We have a deal!” But where to next?

Just as fears of a no-deal Brexit were reaching their peak, news came from Brussels yesterday that a deal is finally reached.

Last Thursday Boris Johnson, the prime minister of the UK, had a semi-formal meeting with Leo Varadkar in the Thornton Manor. Although no one really expected this would lead to any kind of breakthrough, the results were rather surprising. When the two came out of the private meeting room with a smile, declaring that they see “a pathway to a deal”, the exchange rate of pound sterling gained more than 2% against the US dollar on that very day. One week later, the EU passed the new Brexit deal.

Yesterday was definitely a day to remember in both the UK and the EU’s history, but after the cheerful moment, we need to stop and think about what could happen next, and what the implications are.

Firstly, the deal is not final. It did pass a difficult hurdle – coming to an agreement with the EU. However, the hard journey through the British parliament has just begun. Boris Johnson has two days to seek allies before the unusual “Super Saturday” session in the House of Commons. Although Boris believes the deal is of the best interest for both parties and is quite confident about the results of the voting, analysts hold different opinions. Sporting Index, a lottery company who successfully predicted the results of previous Brexit votes, have sent out an email estimating the “Yes” vote would be 313 while Boris needs 320 to pass the deal in the British parliament.

In one scenario, the deal will be passed in the British Parliament this Saturday. This will mean no hard border between Ireland and Northern Ireland, and the rights of EU citizens in the UK will be protected (as will those of UK citizens living in the EU). The UK will leave the customs union as a whole, while Northern Ireland will still remain an “entry point”. For most of us life will remain the same, except we might notice that grocery shopping seems a bit more expensive. Establishing the UK to EU “entry point” on the island is set to make Ireland more of a focus area between the two, which will give rise to both opportunities and challenges. Dublin had already seen big names such as Travelers Insurance Company moving its European business to Ireland to avoid risks associated with Brexit. If the deal is passed and Brexit is official, more London-based international companies will start seeking new bases in the EU, and Ireland is no doubt one of the most appealing options.

If the deal is not passed by the House of Commons, the Benn Act will require the PM to seek an extension of the Brexit date from the EU. For businesses in the UK, this will amount to another period of uncertainty and continuous economic stagnation. For the past three years, uncertainty has caused numerous British companies and investors to suffer, and has seen the bankruptcy of long-standing companies such as Thomas Cook. The Benn Act may appear to be inconsequential for the EU from a political perspective – or even beneficial. However, given the significance of the UK in the global market, the ramifications of further uncertainty for businesses operating there may result in harm for industry in the EU.

Saudi Aramco’s impending IPO is set to be the largest in history

  • The oil giant’s mammoth IPO, to be formally announced this Sunday, is set to earn $40 billion for the kingdom.
  • Saudi Arabia is pushing forward after delays caused by international scandals, drone-attacks and fears of an economic downturn.
  • Investment banks are sharing in $450 million in fees paid out by Aramco in exchange for help with the listing, to the dismay of environmental and human rights groups.

Saudi Arabia’s state-owned oil giant Saudi Aramco has been planning its initial public offering (IPO) for about three years. The energy company is the most profitable in the world, making $111 billion last year – more than the top five publicly traded oil companies combined. On Thursday the government is expected to give the official thumbs-up for the IPO to go ahead, and a formal declaration is to take place this Sunday.

The Crown Prince Mohammad bin Salman’s hope is that selling 3% of the shares in Aramco will raise money (estimated at $40 billion) for the kingdom’s sovereign wealth fund, and the proceeds are going to be used to diversify the Saudi Arabian economy away from an over-reliance on oil. This means it is projected to be the largest IPO ever, with the next highest being Alibaba’s 2014 IPO which raked in $25 billion.

A portion of the oil giant’s shares will be floated on the domestic stock exchange in the capital Riyadh, called the Tadawul, with general plans to pursue a listing on an international exchange at a later date. Why is it that such a lucrative opportunity for the kingdom has taken years to come to fruition?

Intense global backlash related to the murder of the outspoken critic of Saudi Arabia’s government, Jamal Khashoggi, last year almost certainly spooked international investors and resulted in the oil company pushing back its IPO. But more recent crises have heaped uncertainty on the nation’s oil industry specifically.

On September 14, two of Aramco’s largest refineries at Abqaiq and Khurais were attacked by drones, paralysing about half of the nation’s oil production (output plummeted by ~5.7 million barrels per day, which equates to about 5% of global oil production) and destabilising global financial markets. The U.S, a host of European countries and Saudi Arabia itself blamed Iran for the bombings, although the Yemeni Houthis declared themselves responsible.

Aramco states that it has recovered production to pre-drone strike levels, at about 10 million barrels per day. This remains shy of its full capacity of 12 million barrels that it expects to reach by the end of November. While this suggests the oil giant may be resilient in its ability to rebound back to its preferred output, the attacks nonetheless reveal major vulnerabilities in the firm’s infrastructure. Its seeming unpreparedness for threats of this nature no doubt worried potential investors, delaying its IPO.  

On October 7th, one of the Big Three credit rating agencies, Fitch Ratings, downgraded Saudi Aramco’s credit score by a notch given these concerns over security. In addition to all this, at the beginning of this week the price of a barrel of Brent crude measured at less than $60, and this is below the level prior to the drone attack. This signals universal fear among investors of an impending global economic slowdown.

Nonetheless, it’s full steam ahead for Aramco’s entrance to the public market, and in its effort to sweeten the deal for hesitant investors the firm is offering $75 billion in annual dividends. The kingdom is also going to pay between $350-$450 million in fees to professional advisors in exchange for help with selling its shares. This equates to about 1% of the expected proceeds of $40 billion, which is a lower proportion than many engaged in the project were anticipating. For comparison, Alibaba paid $300 million to its pool of investment bankers, coming to about 1.2% of its $25 billion proceeds.

Among those hired to sell Aramco’s shares are ex-Trump national security advisor and partner at Goldman Sachs Dina Powell, and ex- United States congress representative Eric Cantor. According to Bloomberg, “The roster of bankers reads like a who’s who of finance, underscoring the importance of Saudi Arabia a year after the murder of government critic Jamal Khashoggi prompted a brief spell of skittishness over doing business with the country.”

A question hovers over the company’s valuation. The Crown Prince originally desired a valuation of $2 trillion – but this looks to be overly ambitious. A recent Economist report which took the dividend yield as a reliable metric for valuing an energy company found that a valuation of about $1.2 trillion is closer to the mark.

The listing has incited criticism from a swathe of environmental advocacy groups (such as Earthworks and Share Action), discouraging potential investors from financing “the biggest single infusion of capital into the fossil fuel industry” since the passing of the Paris climate agreement in 2016. It has also attracted the ire of human rights watchdogs, who blast Saudi Arabia’s abysmal human rights record in a letter sent to nine international banks associated with Aramco’s IPO (such as JP Morgan Chase and Credit Suisse). The antipathy is only set to escalate following the formal announcement this coming Sunday.

Luckin Coffee: Legend or failing unicorn?

Luckin Coffee was founded in 2017, yet has already established more than 3000 wholly-owned shops in China. The coffee chain successfully completed its IPO in the US this March, only 18 months after the founding of the company, raising $561 million. You may have never heard the name, but it is quickly becoming a key competitor in the ~$10 billion Chinese Coffee retail industry, and threatens the current leading player, Starbucks.

   To differentiate themselves from Starbucks, Luckin Coffee self-describes as a Coffee-Network or Coffee Technology Corporation. In its prospectus, the word “technology” appears 88 times, followed by the third most used word “network”, which appears 79 times.

Technology is clearly the key to its operations. Luckin states that AI enables them to analyse their customers’ behaviour and select better services and products tailored for each individual based on big data. The Luckin Coffee app also plays a major part in their operations. In fact, all purchases of Luckin Coffee are made through its apps (iOS, Android and Wechat’s built-in-apps), and no cashier can be found in any of its shops.

   As opposed to the company itself, the founder of Luckin is probably more famous. Zhiya Qian, the former COO of CAR (China Auto Rental), is known for leading the “subsidy war” in China’s car rental industry and won a large market share for the company. She strongly believes that her success in the car rental industry can be replicated in the fast-growing Coffee retail industry.

   The inner logic of this marketing model is simple. The initial approach is characterised by the use of large amounts of subsidies to break into an industry, in order to build customer loyalty and seize market share with rapid expansion. Having achieved this, the company makes use of “internet thinking” and reduce subsidies to turn losses into gains when most of the other competitors are no longer competitive. Luckin is still in the first stage, as it is still quickly opening more shops and offering huge discounts such as 81%-offs, and pricing the cost of a cup at around 1 euro to attract customers (while the general price per cup is between €4 and €6). The money burning strategy is no doubt doing its job, but the problem is how long can it last?

   In the financial statements from the prospectus, for the three months ended 1st March 2019, Luckin’s total revenue reached $713 million. However, the net loss is $110 million higher. This financial data is a dangerous signal that the speed of growth of the company might not be able to justify the money they have been burning in a foreseeable period of time. Data shows that if Luckin continues losing money at this rate, the company’s cash flow will be in severe danger and may not survive for another two quarters. This may be one of the reasons driving this start-up to rush to hold an IPO. Despite its financial state, Luckin still holds a positive attitude towards its strategy, claiming they will not slow down the rapid chain growth and will continue subsidising its products.

Last month, reporters found some Luckin Coffee shops have started to sell “convenience store food”. Meanwhile the company updated its business scope, adding clothes, shoes, hats etc to its product line. Is this a sign that Luckin Coffee is transforming into a comprehensive new retail chain to save its cash flow? The answer will be seen in no time.

Facebook’s New Global Cryptocurrency, Libra, Hits a Regulatory Roadblock

  • In June Facebook unveiled its plans to launch a new cryptocurrency named Libra, planned to be rolled out in the first half of 2020.
  • Despite efforts to soothe privacy and antitrust anxiety, backlash to the proposal is relentless.
  • A recent Financial Times report suggests that some of its backers are due to cut ties in the wake of severe regulatory scrutiny.

Facebook have announced plans to roll out a new cryptocurrency, called Libra, in the first half of the coming year. The new digital currency can be conceived as a sort of fusion between Bitcoin and fintech services such as Revolut – users will be able to exchange their money for Libra coin and send and receive funds instantly via Facebook’s messenger services, Messenger and Whatsapp. But its ambitions are massive. The long-term aim of Facebook is to build a global digital currency and render worldwide transactions fee-free, instantaneous, and unrestricted.

Libra is an effort by the social media company to build a payments system in the west akin to Tencent and Alibaba’s success in China. There the proliferation of mobile payments – facilitated by Tencent’s WeChat and Alibaba’s Alipay (together accounting for 93% of Chinese mobile payments) – are bringing the country ever-closer to complete cashlessness. WeChat itself originated in 2011 primarily as an instant messaging app, and only integrated a digital wallet in 2014 to compete with Alipay. In this sense Facebook appears to be following a similar route in its quest to dominate the payments industry and quash cryptocurrency and fintech rivals alike – by offering Libra to the 2.4 billion users it already has on its platform.

Facebook seeks to win users over and capture a huge share of the financial payments industry by solving the flaws inherent in Bitcoin – the decade-old and ceaselessly volatile cryptocurrency suffers from long waits for transactions to complete, huge energy costs in said transactions, and an erratic and unpredictable price. The sending and receiving of Libra coin is to be near-instant, intended to consume as little energy as standard debit card transactions, and will be tied to several global currencies in order that its price remain stable.

In order to mitigate privacy concerns or uneasiness that signing up to Libra grants Facebook a disconcerting amount of access to peoples’ financial activity, Facebook says it will decentralise all decision-making related to its currency. A diverse group of 28 firms is to form the Libra Association (including Mastercard, Visa, Spotify, and Uber) responsible for monitoring Libra’s blockchain – that is, the database which keeps track of who owns which Libra coin. Facebook claims that relinquishing exclusive control of access to peoples’ financial data to this group of firms ought to soothe privacy-conscious users’ fears. It’s an uphill battle though, particularly given sustained criticism of its handling of users’ data following the Cambridge Analytica scandal last year. This is partly responsible for the decline Facebook is seeing in usership. In Ireland, the last nine months has seen a drop of 300,000 users – mostly young people. “[Facebook] have twice as many over 50s than they do people under 18,” according to Newstalk’s Jess Kelly.

This trend away from the social network does not bode well for ambitious business ventures on Facebook’s part. But it’s the red tape associated with establishing a new currency that presents the biggest obstacle to the firm’s success. An official investigation into Libra has been opened by EU antitrust agents, and a backlash from data-protection officials across the globe fuelled by privacy- and competition-concerns is raging.

The sting of such regulatory opposition is beginning to be felt at Facebook. In a Financial Times report last week entitled Facebook’s Libra backers look to distance themselves from project, FT claimed that three of Libra’s founding backers professed apprehension about the intense scrutiny of regulators, and a desire to cut off ties with the project altogether. Worsening tension between Facebook (who have “become exasperated by the [project’s] members, according to two people close to the project,”) and the Libra Association may herald a delay in Libra’s arrival, particularly if others in the Libra group share their more vocal colleagues’ dismay. If the tension devolves into outright enmity, perhaps Libra will be shelved altogether, with an augmented form of a mobile payments system to be developed in its place.

Whether Facebook surmounts the tide of regulatory hostility or not, its drive to diversify away from advertising revenue into the global payments system is clear. If this ambition is to successfully take shape in the form of Libra in the next nine months, or some other mutation of same further down the line remains to be seen.

Seanad Calls for Irish Government to Offer More Support for Irish SMEs

Paddy Ryder

The Seanad in recent days has called upon the Irish government to introduce additional supports for Irish SME’s. There are three classifications that compromise the SME sector: micro enterprises, small enterprises and medium enterprises.

A micro enterprise is an enterprise that has fewer than 10 employees and has either an annual turnover and/or annual balance sheet not exceeding €2 million; a small enterprise is an enterprise that has fewer than 50 employees and has either annual turnover and/or an annual balance sheet total not exceeding  €10 million and a medium enterprise is defined as an enterprise that has between 50 employees and 249 employees and has either an annual turnover not exceeding  €50 million or an annual balance sheet total not exceeding €43 million.

The supports recommended by the Seanad will impact all of the aforementioned enterprises. Such supports include further entrepreneurial education in primary schools, specific supports for female entrepreneurs and the introduction of a new junior ministerial role to represent SME’s. The new ministerial position will enable the shaping of SME policy and help to foster the growth of small businesses in traditional sectors. It is hoped that exposing primary school students to entrepreneurship will lead to more economic activity and similarly, that new supports for female entrepreneurs boosts female leadership.

The Seanad found that typical SME concerns included rising business costs most notably the costs of rent, insurance and rates, competitive recruitment, Brexit uncertainty and continuous delays in the roll out of the national broadband plan. Ireland’s tax system was also highlighted as a difficulty with CGT rates significantly higher for SMEs in Ireland than in the UK and other jurisdictions. The EIS scheme for investment into early stage business is also less attractive in Ireland than the UK equivalent.

The EU and US rarely see eye to eye on matters of trade and commerce, but both see SME’s as the backbone of their respective economies, meaning SME’s are the cornerstone of commerce across the globe not just Ireland. Having said this however, the role of SME’s in Ireland is particularly important given that 99.8% of business activities in Ireland are represented by SME’s. This translates to 238,000 businesses, employing more than 1.3 million workers in Ireland, almost half of the entire Irish workforce. SME’s are therefore the main source of jobs in the Irish economy, thus, the new Seanad recommendations are a welcomed proposition and it is hoped that the recommendations can positively impact the Irish business landscape creating conditions that allow Irish SME’s to flourish.

Read the full report at –https://data.oireachtas.ie/ie/oireachtas/committee/dail/32/seanad_public_consultation_committee/reports/2019/2019-05-16_small-and-medium-sized-businesses-in-ireland_en.pdf

Making 2019 Their Own: 4 Irish Start-ups Headed For Success

Malcom Sheil

As the year progresses, many Irish start-ups have kept busy securing investments and spreading their ideas throughout the world. Innovative concepts as well as scalability potential have allowed four start-ups in specific to take the main stage of Irish entrepreneurship. While only time will tell, these four firms have proven to have what it takes to achieve greatness.

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