When the UK voted to leave the EU, companies like Britvic felt the impact almost immediately. In the days that followed the referendum, the soft drinks producer saw its share price fall 10 percent. Soon after, two US investors pulled out of the stock.
‘We were caught up in that basket of FTSE 250 companies perceived as being UK-centric,’ says Steve Nightingale, director of investor relations at the firm. ‘Having spoken to the investors that left, they told us it wasn’t about Britvic per se, but rather the uncertainty that was going to prevail in the coming weeks and months – which has turned into years.’
It’s now almost three years since the referendum when the UK voted, against expectations, to leave the EU. Yet, at time of writing, there is still little clarity about what kind of Brexit we will end up with. To manage the uncertainty, it’s been necessary for companies to communicate their exposure with great care while planning for every eventuality.
Britvic’s initial response was to play it safe – and say little. ‘Having thought it through carefully and consulted with our advisers, we felt anything we said at that point could set us up to fail later,’ says Nightingale. ‘There were no hard facts: it was clearly just a huge change in British politics.’
The owner of brands such as Robinson’s, Tango and J20 has operations in the UK, Ireland, France and Brazil. Factories in the UK source 30 percent of their raw materials from the EU, so a no-deal Brexit could see these imports hit with tariffs. Britvic’s sector is also one of the five most at risk from a no-deal Brexit, according to research from Oliver Wyman and Clifford Chance. The study looks at possible tariff and non-tariff costs of reverting to World Trade Organization rules – the default option in the event of no deal.
In this scenario, it finds five industries – financial services, automotive, consumer goods, chemicals & plastics and agriculture, food & drink – would bear 70 percent of the impact in the UK. An arrangement that includes something similar to the EU customs union would see costs substantially reduced, note the authors.
While details of the withdrawal agreement remained sketchy, Britvic felt giving regular updates to the market on Brexit would be counterproductive – an approach it says the investment community understood.
‘Anything you put out would probably be inherently wrong within a few days or weeks,’ explains Nightingale. ‘You’d be in a constant scenario of updating the market. Most of the investors we spoke to were quite sanguine about it. They said, We don’t expect you to give a running commentary.’
Risk assessments
It was only later in the process that Britvic decided to lay out its Brexit contingency plans. ‘Once it became clear what the potential deal could be, and the fact that there was still the possibility of a no-deal Brexit, we came to market toward the end of 2018 and formally laid out the risk assessment,’ says Nightingale.
The market was kinder to larger British companies following the referendum. The FTSE 100 generates 70 percent of its revenues outside the UK, giving it less exposure to the effects of Brexit. In fact, the sharp drop in the pound that followed the vote meant many companies would see a boost to their results: revenues in other currencies would appear bigger when converted to sterling. Three months after the shock referendum result, the blue-chip index was actually up a healthy 10 percent.
The task of preparing for Brexit looked anything but easy, however, especially for firms in heavily regulated industries such as pharmaceuticals and banking. For AstraZeneca, the first priority after the vote was to explain the company’s exposure to the UK market.
‘We were headed into the Bank of America Merrill Lynch conference in London the morning after,’ recalls Thomas Kudsk Larsen, head of IR at the FTSE 100-listed pharmaceuticals firm. ‘It was quite hectic, but we could address many people at the conference all at once. We fielded many questions on our UK exposure as a company: sales, profit, assets, people, and so on.’ While officially a UK company, AstraZeneca is well diversified across the UK, Sweden, the US and China [for its major sites]– a point the IR team emphasized to investors.
The pharma industry, like financial services, needed to prepare early for a potential no-deal Brexit given the complexity of European regulation on the industry. In July 2018, four months before the UK-EU withdrawal agreement was endorsed, AstraZeneca revealed it had already spent £40 mn ($52.4 mn) on Brexit preparations and increased its drug stockpiles by 20 percent.
‘As we moved into last year, we felt the need to talk more about our specific Brexit preparations and we covered the topic at the Q3 2018 results conference call and again repeated the preparedness message at the Q4 2018 results presentation in London,’ says Larsen.
In the presentations, AstraZeneca highlighted ‘significant preparations to handle different scenarios’, such as duplicating control processes in the UK and EU, building up medicine supplies in both locations, and identifying alternative supply routes in case existing ones struggled to function under a no-deal Brexit.
A view from the continent
In mainland Europe, Brexit has also become a recurring question for IR teams. It’s become ‘kind of compulsory’ for investors to ask about it, says Ignacio Cuenca, director of IR at Spanish power company Iberdrola.
When the referendum result came in, the Bilbao-based firm knew it needed to move quickly given there would be many calls about its large UK subsidiary, Scottish Power. ‘We immediately sent a statement to our database of investors about how we saw the impact: the weight of our British business in the whole group, profit-and-loss account and balance sheet, the debt, and so on,’ says Cuenca.
‘It’s important to point out that the product we are selling to the British people is based in pounds and we generate our results in pounds. It is a purely local activity without any importing or exporting of goods. The big impact will come in the translation of the results in pounds to the results in euros in our accounting.’
While his company is insulated from the main effects of Brexit, Cuenca has noticed a chill in investor sentiment across the British utilities sector. International investors are not only concerned about Brexit itself but also the paralysis gripping the UK parliament, he explains. ‘What we have heard from investors is that the UK used to be the safest haven for a utility several years ago,’ he says. ‘Now it is one of the worst markets to invest in.’
Brexit has caused a flight of money from British stocks. For fund managers that have to invest in the UK, however, Britvic has emerged as a popular choice. A consumer staples firm with high free-cash flow and a growing dividend, the company is now viewed as a safer bet amid all the Brexit uncertainty. ‘Investors know that if we are going into a bumpy period, defensive stocks are quite a good place to have some money right now,’ Nightingale points out.
Meanwhile, Brexit preparations at the company continue, planning for all the eventualities that remain on the table. ‘It’s that kind of unique event where you know, of all the things you are doing, the vast majority of them will not come to fruition,’ Nightingale says. ‘But you don’t want to be the one who hasn’t planned for it.’
Back to 2008
British companies were struggling to get the attention of global investors even before Brexit, says Bank of America Merrill Lynch. Investor sentiment turned negative on UK stocks – meaning a net percentage were underweight rather than overweight – in April 2014 and remain negative to this day, according to findings from the bank’s regular fund manager survey.
‘After the Brexit referendum the readings became more negative,’ explains Paulina Strzelinska, a strategist at the bank. ‘Similar pessimism was previously seen during the global financial crisis.’
This article was published in the summer 2019 issue of IR Magazine
