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Monday, May 23, 2022

U.K.’s Continental Divide Fuels Separation Anxiety

When voters in the United Kingdom voted to leave the European Union on June 23, it didn’t seem to have much to do with business in Los Angeles.

Yet within hours, some of L.A.’s biggest companies felt shockwaves from the seismic economic event. Shares of downtown commercial real estate services firm CBRE Group Inc. plummeted 9 percent to close at $27.31 on June 24 on fears of a slackening London property market. The United Kingdom accounted for about 10 percent of CBRE’s earnings last year, according to the firm. Shares of Century City engineering firm Aecom also tumbled, falling 4.2 percent to $30.87, due to perceived risks to its British government projects.

Meanwhile, many L.A.-based businesses with a foothold in the United Kingdom will have to decide if and when to reorganize their British operations due to the country’s uncertain trade relationship with members of the European Economic Area going forward.

“The answer to a very big number of questions about what the future holds is, it depends on what’s negotiated,” said Chris O’Connor, British consul general in Los Angeles, regarding trade negotiations set to take place in October between Britain’s next prime minister and the European Union. “That two-year negotiating process will decide just about everything, whether the change is very dramatic from our current position or whether the change is minimal.”

At least one local company, however, is taking a proactive approach and preparing for a scenario in which the United Kingdom is no longer a viable launching pad into the greater European market due to an unfavorable economic and trade climate.

FreedomPop of West Hollywood, a low-cost cellphone plan provider that has an office in London and is planning to expand in Europe.

“It’s kind of a pain in the ass from an operational perspective,” said Stephen Stokols, FreedomPop’s chief executive. “We had our European headquarters in London. We’re going to have to move it to Madrid or somewhere else in the EU.”

Laundry list

As part of upcoming negotiations, British and EU officials will need to sort through a laundry list of tariffs, product standards, and immigration policies and decide which ones to keep in place after the U.K.’s official exit from the union. These regulatory outcomes will impact the ability of L.A.-based businesses – and others around the world – to use the United Kingdom as a base in Europe’s single market.

“The relationship (between the United Kingdom and European Union) is so significant there will be a lot of pressure for companies on both sides to do something on the trade relationship and to keep it as is,” said Kati Suominen, chief executive of Nextrade Group, a Beverly Hills trade consulting group.

Yet others are not as optimistic as political tensions run high across the continent, said Nick Vyas, executive director of center for global supply chain management at USC’s Marshall School of Business.

“The way emotions have been running, it’s highly unlikely that (the United Kingdom) will have all the benefits that they want, but not be part of the EU,” he said, noting that the European Union won’t likely let countries pick and choose the responsibilities and benefits of membership. “It would create a tremendous incentive for (other nations) to say, I can have my cake and eat it, too.”

Uncertainty reigns

Though popular discontent against the European Union has grown in Britain in recent years, financial markets performed steadily in advance of the vote in expectation of a victory for the “remain” campaign. When that failed to materialize, the stock and currency markets reacted negatively.

The Dow Jones industrial average dropped 546 points on June 24 (though it has rallied since) and the British pound lost 11 percent of its value after the decision, trading as low as $1.32 against the dollar. FreedomPop felt the impact of the currency fluctuation immediately.

“All of the U.K. revenue is slashed,” Stokols said of his company’s British operations. “It definitely affects us.”

CBRE’s losses were driven in part by a perception among investors that the company’s U.K.-based revenue would diminish amid the likelihood of lower demand in the London commercial property market.

For example, a study by Greenstreet Advisors projected that the value of London office property might fall by as much as 20 percent within three years of the U.K.’s exit from the European Union as businesses move out of the country and the economy stagnates.

CBRE has asserted that the impact on its business will be minimal because of its diversified operations.

“CBRE’s business is diversified globally by line of business and geography,” said Robert McGrath, a senior director of corporate communications for the company. “We have a well-balanced business in the United Kingdom and a significant portion of our revenue in that country comes from contractual relationships with property investors and occupiers.”

Aecom, whose stock also took a hit over concerns that its commercial contracts with the British government could be in jeopardy, is similarly confident that diversification and strong contracts will cushion any downturn in the British economy.

“The U.K. government has asserted its commitment to delivering on key infrastructure needs for the long term, which includes projects designed to improve lives, expand mobility, and extend energy independence and security,” Michael Burke, Aecom’s chief executive, said in a statement.

But the ripples have indeed crossed the Atlantic and forced some to make changes before negotiations between U.K. and EU officials even begin.

“We have one bank account for all of Europe now,” said FreedomPop’s Stokols. “We have to set up another bank account. If you want to be in the U.K. and Europe, you have to duplicate everything you do.”

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