U.K. to Look Closely at Defense Buyouts on Security Grounds
(Bloomberg) -- The U.K. will look more closely at ongoing takeover bids for U.K. aerospace and defense companies to evaluate whether they will impact national security, Business Secretary Kwasi Kwarteng said in an interview.
Speaking after Ultra Electronic Holdings Plc accepted a 2.57 billion pound ($3.6 billion) buyout from private-equity backed Cobham Ltd, Kwarteng said he accepted that takeovers in the sector remain sensitive.
Asked whether assurances had been given that none of a recent flurry of mooted deals from defense to retail would harm U.K. jobs, expertise and security, Kwarteng said: “That’s exactly what we are looking at.”
Kwarteng cited the situation in Afghanistan as a reason for the government to remain engaged, and said it would be important to establish whether takeovers are in the public interest.
Prime Minister Boris Johnson’s government is under pressure after standing back and allowing past deals to proceed, including when Cobham itself was acquired by U.S. private equity outfit Advent International Corp. in Jan. 2020 despite opposition from senior defense figures. After disposals, Cobham now has no U.K. manufacturing presence.
Ultra is a supplier of sonars for submarine-hunting and also directly to Britain’s Trident submarines, including the new Dreadnoughts.
Kwarteng said government ministers are unable to intervene under the Enterprise Act until bids are formally lodged. Without specifically naming Ultra, he added: “I’ll be looking very shortly at the evidence and the papers and see whether things are public interest or not.”
Chi Onwurah MP, Labour’s Shadow Business Minister, said the government is “making weak and vague noises” to protect Ultra.
“Serious questions remain about potential threats to national security, the business model of the new owners, and future governance and operational freedoms,” Onwurah said in an emailed statement.
As well as the agreed deal for Ultra, another defense company, Meggitt Plc, is being pursued by two American groups, Parker-Hannifin Corp. and TransDigm Group Inc. The TransDigm offer was about 13% higher than the 6.3 billion pounds offered by Parker-Hannifin, which the board recommended.
Meggitt chairman Sir Nigel Rudd has said Parker would be a “responsible steward” of the company after it guaranteed manufacturing headcount. In an interview with the Sunday Times he separately called on the U.K. to block any bidders who fail to offer binding commitments on investment and jobs.
Trade union Unite called for a halt to what it called a “feeding frenzy” by U.S. investors, saying that the Ultra and Meggitt bids put at risk the U.K.’s sovereign defense capability. In a statement, Unite asked the government to use the Enterprise Act to block future sales.
Concerns that Britain had too much of an open-door policy on sensitive mergers and acquisitions lay behind the recent passage of the National Security and Investment Act, widening government powers to screen proposed deals and intervene on security grounds. However, the legislation only applies to transactions agreed from next January.
Analysts say low valuations of British companies currently make them especially vulnerable to takeovers by foreign companies and private equity groups.
A focus on short-term profits over longer-term investments is also making U.K. firms more liable to take the cash injection promised by a buyout, according to independent aerospace and defense analyst Howard Wheeldon. He sees the government ultimately approving the Ultra sale.
“There will be a lot of prevarication and a lot of words but in the end what can they do,” he said. “If they stop the deal, they are strangling the company’s own future.”
Kwarteng is also facing calls to intervene in the bids for the pharmaceutical company Vectura Group Plc from Phillip Morris International Inc. and Carlyle Group Inc, as well as for Wm Morrison Supermarkets Plc by Fortress Investment Group and Clayton, Dubilier & Rice LLC.
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