When Boris Johnson defended the Cobham buyout for £ 4bn by an American private equity firm two years ago, the Prime Minister could not have foreseen the stampede of foreign suitors knocking on the doors of other companies in the British aerospace and defense sector.
Over the past three months, buyout offers totaling nearly £ 10bn have been made for three UK defense companies: Ultra Electronics, Meggitt and Senior.
Of these, only Senior pushed back his suitor, the US private equity firm Lone Star. Meggitt is set to be the subject of a bidding war between two US engineering firms, while Ultra has agreed to a £ 2.6bn takeover by Cobham, owned by buyout group Advent International .
For Johnson and his team, including Thatcherite free market ministers such as Business Secretary Kwasi Kwarteng, Ultra’s takeover plan is shaping up to be a key test of their defense and industrial policy. Experts want to know if Johnson will continue the hands-off approach to making deals traditionally taken by Conservative governments, which would involve letting more British defense companies fall into foreign hands.
Johnson made it clear during the coronavirus crisis that he wants Britain to be more self-sufficient. The government has also shown – at times – a more interventionist approach to industrial policy: it took a stake in broadband satellite operator OneWeb and nationalized Sheffield Forgemasters, a supplier of critical parts for British nuclear submarines.
MPs and union officials have warned that the scramble for takeovers in Britain’s defense sector could lead Britain to lose control of industrial assets crucial to the military. The government only owns preferred stock – a mechanism that can be used to block takeovers – in the UK’s two big defense firms: BAE Systems and Rolls-Royce.
There is no such protection for Ultra, but it is a critical supplier to the Royal Navy, providing warfare technology as well as control systems for the British fleet of Trident nuclear submarines.
Kwarteng last week launched a government investigation into the Cobham buyout plan and referred it to the competition regulator, who will advise ministers on whether the deal would harm national security. He tweeted that “the UK is open for business, but foreign investment must not threaten our national security”.
Lord Michael Heseltine, minister in the Conservative governments of Margaret Thatcher and John Major, criticized the government’s approach to the buyout of Ultra, saying everything appeared to be for sale because ministers lacked an industrial strategy.
But he praised Kwarteng’s decision to refer Ultra’s takeover to the French Competition and Markets Authority. “Despite the fact that we no longer have an industrial strategy, we have actually acted as if we have,” he said. “It’s at least a little consolation.”
Paul Everitt, former chief executive of ADS, the UK’s aerospace and defense trade body, said Britain was at a “tipping point” in making deals in the sector.
He wants the government to consider three areas when assessing takeovers affecting the industry: the business model of potential owners, proposed governance, and the cumulative impact on Britain’s industrial resilience.
Everitt questioned whether the private equity model, which is typically shorter-term than that of an industrial buyer, was the right one for a technology with national security implications. The minimum commitments to own a business must be beyond reproach, he said. The government “should not worry about the departure of the potential buyer,” he added.
Advent’s purchase of Cobham, which was finalized last year, has been the subject of controversy. Although the government conducted a review of the deal before approving it after Advent agreed to a series of commitments, the private equity firm continued to sell off much of the business. Cobham now has no UK manufacturing presence.
Cobham said last week it would offer “legally binding and enforceable commitments” on Ultra, including “appropriate protections for UK sovereign capacity, continuity of supply and critical capabilities in the UK “.
Kevan Jones, Labor member of the House of Commons defense select committee, said the government should conduct an “in-depth review of these companies and their supply chains which are critical to defense and security. from the United Kingdom”.
Ministers needed to know what skill sets and intellectual property need to be protected before an offer is tabled, he added. The government, with its current approach, “was stealing blind,” Jones said.
In the spring, ministers launched a new industrial defense and security strategy, promising a greater focus on UK assets, but critics said they had so far seen little evidence of these ambitions put into practice.
Some experts also believe that if the government takes a tougher line on potential takeovers, it needs to build long-term relationships with UK suppliers and offer a more reliable stream of domestic contracts.
An additional complication for ministers is that takeovers are still considered under the 2002 Companies Act rather than the new National Security and Investment Act, which expands the government’s powers to intervene for issues. security reasons and is expected to come into full force in January.
Darren Jones, Labor chairman of the House of Commons affairs select committee, said that while the government’s general rhetoric on a greater focus on national security was clear, there remained uncertainty as to how that would be. put into practice through the National Security and Investment Act.
“Right now we’re operating in a kind of vacuum where there’s a legal framework on the books, huge activity in the marketplace but no real understanding of what this set of ministers think and therefore how they might apply the the laws they put in the books, ”he added.
The government said it was “engaged in competitive, innovative and world-class defense and security industries.”
New legislation would strengthen the government’s powers to “screen and, if necessary, intervene in foreign investment in Britain’s defense sector and in the most sensitive areas of the economy,” he added. .