When Boris Johnson defended the £4bn takeover of Cobham by a US private equity firm two years ago, the prime minister could not have foreseen the rush of foreign suitors knocking on the doors of other companies in the UK aerospace and defence sector.
In the past three months, takeover proposals worth almost £10bn on a combined basis have been made for three British defence companies: Ultra Electronics, Meggitt and Senior.
Of these, only Senior has repelled its suitor, the US private equity firm Lone Star. Meggitt looks set to be the subject of a bidding war between two US engineering companies, while Ultra has agreed 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, the proposed takeover of Ultra is shaping up as a key test of their defence and industrial policy. Experts want to know whether Johnson will pursue the hands-off approach to deal making traditionally taken by Conservative governments, which would imply letting more UK defence companies fall into foreign hands.
Johnson has made 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 has taken a stake in satellite broadband operator OneWeb and nationalised Sheffield Forgemasters, a supplier of critical parts for Britain’s nuclear submarines.
MPs and trade union officials have warned that the rush of takeovers in the UK defence sector could lead to Britain losing control of industrial assets that are crucial to the armed services. The government only has golden shares — a mechanism that can be used to block takeovers — in the UK’s two large defence companies: 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 UK’s fleet of Trident nuclear missile submarines.
Kwarteng last week launched a government investigation into Cobham’s proposed takeover by referring it to the competition regulator, which will advise ministers on whether the deal would impinge on national security. He tweeted that the “UK is open for business, however foreign investment must not threaten our national security”.
Lord Michael Heseltine, minister in the Tory governments of Margaret Thatcher and John Major, has criticised the government’s approach on the Ultra takeover, saying anything appeared to be up for sale because ministers did not have an industrial strategy.
But he welcomed Kwarteng’s decision to refer the Ultra takeover to the Competition and Markets Authority. “Despite the fact that we have no industrial strategy any more we have actually acted as though we have,” he said. “That’s at least some small consolation.”
Paul Everitt, former chief executive of ADS, the UK aerospace and defence trade body, said Britain was at a “tipping point” with deal making in the sector.
He wants the government to consider three areas in evaluating takeovers affecting the industry: the business model of the prospective owners, the governance proposed and the cumulative impact on Britain’s industrial resilience.
Everitt questioned whether private equity’s model, which is typically more short-term than that of an industrial buyer, was the right one for technology that has national security implications. Minimum commitments to hold a business need to be iron-cast, he said. The government “should not be worried about the potential buyer walking away”, he added.
Advent’s purchase of Cobham, which was completed last year, has been dogged by controversy. Although the government conducted a review of this deal before approving it after Advent agreed to a series of commitments, the private equity firm has gone on to sell off large parts of the company. 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 sovereign UK capability, continuity of supply and critical capabilities in the UK”.
Kevan Jones, a Labour member of the House of Commons defence select committee, said the government should conduct a “root and branch review of those companies and their supply chains which are critical to UK defence and security”.
Ministers needed to know which skill sets and what intellectual property have be protected before a bid comes in, he added. The government, with its current approach, was “flying blind”, said Jones.
In the spring, ministers launched a new defence and security industrial strategy, promising a greater focus on UK assets, but critics said they have so far seen little evidence of those ambitions put into practice.
There is also a view among some experts that if the government does take a harder line on potential takeovers, it needs to put in place long-term relationships with UK suppliers and offer a more reliable stream of domestic contracts.
An added complication for ministers is that takeovers are still being examined under the 2002 Enterprise Act rather than the new National Security and Investment Act, which broadens government powers to intervene on security grounds and is due to come into full force in January.
Darren Jones, Labour chair of Commons business select committee, said that, while the overarching government narrative of a greater focus on national security was clear, there was still uncertainty about how this would be put into practice via the National Security and Investment Act.
“At the moment, we are operating in a kind of vacuum where there is some legal framework on the books, a huge amount of activity in the market but no real understanding as to what this set of ministers think and therefore how they might apply the laws that they put on the books,” he added.
The government said it was “committed to competitive, innovative and world-class defence and security industries”.
New legislation would enhance the government’s powers to “screen and, where necessary, intervene with regard to foreign investment in the UK defence sector and across the most sensitive areas of the economy”, it added.