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Brexit fears of leading CFOs

As expectations of the UK crashing out of the EU without a trade deal grow, finance leaders of FTSE 100 firms voice their doubts.

Finance chiefs at some of the UK’s biggest companies have raised concerns about the prospect of a no-deal Brexit as the likelihood of that outcome has grown in recent days.

Monday’s decision by the Cabinet to “ramp up” preparations for a no-deal Brexit come amid uncertainty over the fate of Theresa May’s proposed EU exit deal, especially as a vote by MPs on it has been pushed into January.

“We don’t think that a no-deal Brexit will be good for business or for investment in the UK,” says Adrian Marsh, the CFO of FTSE-100 packaging group DS Smith.

Marsh says that as a leading UK manufacturer, DS Smith has been discussions with the government-which is updating 140,000 firms on how they should prepare for a n0-deal outcome.

Marsh says: “We have a team of people that have been working with the Government on detailing what our views are, and what we think from an industry perspective, given we’re one of the biggest manufacturing groups in the UK. What is clearly important is the continuation of trade, it’s absolutely key,” he says.

“No deal is a distinct possibility. We don’t think that will be good for business, and investment in the UK,” Marsh says. “In terms of profitability, how we operate, the impact will  be very limited, but as an executive of a UK-listed company, it would be deeply disappointing,” he says.

Marsh says the damage to DS Smith will be minimised because the group has reduced its UK weighting from 85% to 15% through multiple acquisitions in recent years. “It’s obviously by design, not because we foresaw Brexit, but because we were over-exposed to the UK. Continental Europe is where our customers are, where the growth is, and also North America,” he adds.

When it comes to hedging currency, to offset the possibility of a sharp fall in the pound in the event of a no-deal Brexit, Marsh says: “The only way you can currency hedge is by having cash outside the UK, in currencies where your cost bases are. Our manufacturing bases are overseas, and that’s where we generate our cash flow,” he adds.

Brexit scenario planning

According to a recent Bank of England survey, two thirds of British companies have made no changes to their business plans as a result of Brexit.

Oliver Tant, CFO of Imperial Brands, says although the £22bn tobacco giant is most concerned by the dangers posed by a no-deal Brexit, there are so many possible outcomes in the Brexit saga that its difficult to plan for. “We were very clear we wanted to remain, from an international trade perspective,” he says.

He says a sinking pound is bad for the group because although manufacturing is sited overseas, half of all shareholders are UK based, who benefit from relatively low cost production. “There is inevitably going to be an impact on exchange rates because 90% of our business is outside the UK.  On the day of the Referendum we saw quite a dramatic effect on the share price,” he says.

“Then there are localised issues, such as the movement of goods, the customs union would be a positive development as we would be able to continue to manage the flow of goods,” he says.

There will be tax structuring issues, says Tant. “With a hard Brexit all the tax structuring gets unwound, in particular some of the existing treaties around with-holding taxes on dividend distributions lose effect and the UK beneficiaries of those dividends end up having to pay some with-holding taxes in the jurisdiction of origin,” he adds. “It’s an additional tax burden to be paid out to the EU.”

Tant says there is also the impact on the movement of labour to consider. “We are an international business. In our UK head office two members of our executive team are German, and we’ve had Dutch and Spanish members before that,” he says.

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