Weekly News Wrap: Airbnb IPO, Buy Now Pay Later Regulations, Australia’s New Trade Deal

Monday 23 November 2020

Our pick of the week’s biggest stories affecting markets

IN FOCUS: AIRBNB FILES IPO

What’s going on?  

 Airbnb is set to list on the NASDAQ in early December after having to postpone their IPO back in March when the pandemic began. The company is essentially an online marketplace for holiday rentals.

It’s reported the company’s hoping to raise up to $US3 billion, although currently the placeholder number is $US1 billion. At the moment, we don’t know the number of shares on offer or the price range. It’s likely the company will be valued around $US30 billion or more which could make it the biggest US float this year – a far cry from a valuation of just $US18 billion during the first wave of the pandemic.

Airbnb will be one of a number US technology companies going public this year. DoorDash, Palantir, Asana, Snowflake and BigCommerce are all set to IPO too.

What’s the backstory? 

Brian Chesky, Nate Blecharczyk and Joe Gebbia came up with the idea for Airbnb back in 2007, since then they’ve managed to get 4 million hosts (people with space to rent out) to sign up to their platform. Before March, the company had been valued at $US30 billion, after Covid hit, valuations put the company at just $US18 billion.

So how bad was it?

From January to September, gross booking value fell 39% to $US18 billion while revenue fell 32% to $2.5 billion. At its worst, in April, Airbnb’s bookings dropped 72% compared to 2019 – but just two months later bookings were only down 21% year on year.

Defying grim forecasts, the company has managed to post a profit this year. Airbnb had to lay off 25% of its staff (approximately 2000 people), and also had to raise $US2 billion in debt and equity securities in April. Airbnb used more than $1 billion to provide refunds. They also committed to up to $250 million for hosts impacted by cancellations in a move to bolster confidence and the marketplace.

After the initial shock, people did begin to travel again – but closer to home – with staycations and rural escapes proving popular. Airbnb’s been well positioned to take advantage of the pivot in the market- and because Airbnb facilitates bookings, but doesn’t own properties, the cost of rooms going unused has been negligible. Hotel chains, on the other hand continue to suffer.

The third quarter of this year has been Airbnb’s most profitable ever by EBITDA standards. It reported $US501 million in income and a profit of $US219 million by reining in expenses and costs (down 35%), even as revenue fell 18% to $US1.3 billion. It was an extraordinary flip compared to the second quarter, the company posting a $US400 million loss.

What does it mean going forward?

While weathering a pandemic is laudable, and Airbnb was profitable in 2017 and 2018, it lost money in 2019. Growth had also been slowing before the pandemic. The cost cuts which were necessary for the company’s survival have also meant ideas like flight bookings and a loyalty scheme have been abandoned. It’s also $US2 billion in debt as of September 2.

But looking at the travel market, Airbnb has managed to survive better than most: Booking Holdings Inc.’s revenue in the third quarter was down 48%, and Expedia Group down 58%. 


In Brief:

AFTERPAY AND OTHER BUY NOW PAY LATER COMPANIES FACE NEW REGULATIONS

The financial watchdog has handed down its report on the buy now, pay later sector. The upshot: companies like Afterpay, Zip and FlexiGroup will be required to limit the kinds of customers they target.

The Australian Securities and Investments Commission found 1 in 5 users are missing payments and incurring late fees, with the companies raking in $43 million as a result. 1 in 5 users also told the regulator they were going to extreme measures, like not buying food and taking out more loans to service their debts.

ASIC stated: “If the buy now pay later provider’s data indicates that consumers are paying missed payment fees repeatedly, for example, or that these fees represent a significant proportion of the amount borrowed, the provider will need to consider why this is occurring… and how this can be addressed.”

While it sounds like a concerning prospect for investors, ASIC also said consumer harm would be dealt with by self-regulation and targeted regulatory tools rather than broader obligations. The report also highlighted practices by the companies that limited excessive fees. 


AUSTRALIA SIGNS MAJOR TRADE DEAL ALMOST A DECADE IN THE MAKING

15 countries including Australia have signed a major trade deal covering almost a third of the world’s economy. The Regional Comprehensive Economic Partnership(RCEP) has taken 8 years to negotiate with Australia, China, Japan, South Korea, New Zealand and the ten members of ASEAN, including Indonesia and Vietnam all signatories.

It means a more common set of rules across the nations. Not only will it be easier for exporters who trade in goods, but it will also make trade easier for trade in services. Most of the service sector including: financial, banking, aged care, health care, education as well as architectural, engineering or planning services will now find it easier to work with the other 14 countries. Unfortunately, India almost signed up to the deal, but pulled out last year. It’s unknown how current trade tensions with China will be affected.


INSURANCE COMPANIES COULD BE LIABLE FOR MILLIONS AFTER COURT DECISION

Insurance Australia Group has lost a test case in the NSW Supreme Court, where an insurance policy referred to a law that no longer existed, now putting them at risk of $865 million worth of claims. Their business interruption policies referred to “quarantinable diseases” under the Quarantine Act, unfortunately that Act was repealed and replaced by the Biosecurity Act in 2015 and many insurers did not update the wording in their policies.

The test case means IAG chief executive Nick Hawkins announced a $750 million snap capital raising because about half of IAG’s 76,000 business interruption policies have the mistake. IAG isn’t the only one, with Suncorp also suffering the same problem, but luckily for them they’re likely only liable for a maximum of $195 million.

IAG ended up going into a trading halt of Thursday and Friday because of the ruling, but the cost might end up being far less than feared. The Chief Executive saying the $865 million number is very conservative, while The Insurance Council of Australia is considering appealing to the High Court.

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