This U.S.-U.K. Defense Deal Will Be Hard to Stop
(Bloomberg Opinion) -- The U.K. Government is right to have a closer look at the takeover of defense contractor Cobham Plc by a U.S. private equity firm. But while the company’s sale is a loss to Britain, an arbitrary block on this deal would inflict even greater damage.
Boston-based Advent International is offering 4 billion pounds ($5 billion) for the company, which is the world’s biggest supplier of air-to-air refueling systems for military planes. The economics of the transaction are clear. Cobham is largely now a U.S. business by sales. Under U.S. ownership, Cobham will have an even better stab at Washington contracts. It might be easier to complete the company's turnaround under private ownership, without the short-term pressure to deliver quick wins for stock-market investors.
The deal pays away a share of this value creation to shareholders in a 34% premium over where Cobham was trading a few months ago. The board thinks that’s a fair trade. The vast majority of shareholders want the deal.
For the U.K., there are no obvious benefits. The only question is whether the deal does harm.
The government said Wednesday it would scrutinize the national security implications of the acquisition just days after investors approved the transaction. Cobham’s sales to the U.K. military, relative to other suppliers and its own business, are small, but that’s not relevant. What matters is whether any of its businesses, regardless of their revenue, are critical to national security and would be harmed by a change of ownership.
Still, if Cobham is so vital, why doesn’t the government already have a golden share that would give it de facto control? The hurdle for blocking the acquisition should be high. After all, other governments are happy to hand sensitive contracts to what to them is a foreign supplier. Melrose Industries Plc’s takeover last year of aerospace group GKN Plc provides the benchmark here. The buyer was British but the government extracted a veto on the future sale of certain assets.
There are more general concerns around the loss of another U.K.-based international business in a high-tech area following the sale of chip designer ARM Holdings Plc and satellite television group Sky. Advent has an incentive to invest in Cobham. That may or may not be good for British jobs. But the head office will ultimately go, along with other expertise that serves it. Britain loses some top management talent; important decisions get made elsewhere. None of this is good for the country unless it’s part of a cycle where new domestic firms are on the rise and securing global positions in emerging industries.
The reality is that Cobham’s relevance to Britain has diminished, and vice versa. The U.K.’s military spending isn’t big enough to support a sizeable homegrown industry, especially when contracts are put out to tender internationally without domestic favoritism.
The government should demand remedies to any genuine security issues it sees. But a block without good reason would set a protectionist precedent, deter foreign bids, shield poor-performing managers from the threat of takeover and deprive investors of the opportunity to exit investments at premium. If the U.K. merely rues that Cobham is worth more in U.S. hands, it should instead ask whether past industrial policy is to blame and learn the lessons.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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