The two deals forcing Britain to show its hand on M&A

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Britain’s M&A identity crisis

A global Britain that is open for business has been the mantra of Boris Johnson’s government as it has tried to define its ambitions after Brexit. 

Yet in a post-Covid world, Johnson and his team — which includes Thatcherite free-market ministers such as business secretary Kwasi Kwarteng — have recognised the importance of self-reliance and economic sovereignty. 

Kwasi Kwarteng, UK business secretary © Leon Neal/Getty Images

The current spate of takeover bids for listed UK companies is shaping up to be a key test of which of these philosophies will prevail, the FT’s Sylvia Pfeifer reports

Critics say Britain’s leaders have for too long adopted a case-by-case approach to takeovers, one that hasn’t always been consistent. 

And they barely seemed to notice a flood of acquisitions of companies such as security group G4S, motor recovery specialist the AA, insurers RSA and LV= and potentially now Wm Morrison, whose roots stretch back to a 19th-century Yorkshire market stall. 

Two takeovers in particular, however, pose more difficult questions.

There’s the proposed £2.6bn acquisition of Ultra Electronics by Cobham, which is owned by the US private equity group Advent International, and Nvidia’s planned $54bn takeover of British chip designer Arm. (Also coming down the tracks is a possible bidding war for the aerospace and defence group Meggitt.) 

Cheap debt abounds, fuelling a record number of takeover approaches, including that by Cobham for Ultra Electronics © Aviation Visuals/Alamy

Kwarteng has announced a formal investigation into the takeover of Ultra, a key supplier to the Royal Navy. The UK has referred the Arm deal for a national security review, and must now decide whether to open an in-depth probe based on both national security and competition concerns after the Competition and Markets Authority’s chief Andrea Coscelli said last week that the deal risked “stifling innovation” and causing higher prices. 

This approach has made the British government’s response to a foreign takeover of strategic national assets difficult to predict.

When SoftBank agreed to buy Arm after the country’s 2016 vote to leave the EU, politicians hailed it as a vote of confidence in post-Brexit Britain. When Advent bought Cobham, the UK asked for commitments, but those pledges didn’t prevent the private equity firm from selling off more than half of the Cobham business within 18 months. 

Two interventions don’t make an industrial policy. But with Johnson’s government looking to tighten its scrutiny of takeovers via the National Security and Investment Act, due to come into force in January, they might offer some clues.

Why are investors buying empty offices?

The City of London is subdued, almost nine in 10 desks in London’s workplaces are empty, and answers on the future of work remain stubbornly out of reach. 

Yet offices are trading at pre-pandemic prices and shares in developers such as British Land, Helical and Derwent London are climbing back to levels last seen in early 2020, the FT’s George Hammond reports

Line chart of Office vacancies have almost doubled since coronavirus hit showing City of London offices empty out

The bullishness hinges on a belief that while companies will cut down on older, tired office space, developers’ shiny new buildings will be snapped up by investors hunting returns. 

But it’s easy to see how plummeting rents and occupancy levels in one part of the market could cause contagion, gradually hauling down values at the top end as well as the bottom. 

“Agents and valuers who think nothing has changed have their heads in the sand,” said Zachary Gauge, who leads UBS’s European real estate strategy and research. 

And with costs for office owners expected to mount — as tenant demands become more exacting and environmental standards edge up — offices bought at stretched prices could quickly become bad bets. 

Part of the explanation for investor ebullience about offices is a dearth of other options. Bond yields are near record lows and other corners of the property sector such as retail and hospitality have taken a pounding. 

UK office yields flatline thanks to Brexit, Western European vs UK average prime yields (%)

Market fundamentals are not the main factor driving investment decisions today, says Mat Oakley, head of European commercial property research at real estate company Savills.

Instead the market is driven by “the weight of money” that is looking for a home.

Sanjeev Gupta’s white knight returns

When the Serious Fraud Office launched an investigation into suspected fraud, fraudulent trading and money laundering at Sanjeev Gupta’s GFG Alliance in May, it looked like the metals magnate’s options for raising new financing had narrowed considerably. 

But with commodities prices booming, one party that initially signalled squeamishness at the SFO probe has forgotten its qualms.

Sanjeev Gupta, who runs metals conglomerate GFG Alliance © Bloomberg

That would be White Oak Global Advisors, a San Francisco-based lender that has attracted investments from the pension funds of teachers in Lancashire, nurses in New York and workers at Boeing

Soon after the SFO’s announcement, it said it was “not in a position to continue discussions with any company that is under investigation by the Serious Fraud Office for money laundering”. GFG has denied wrongdoing and said it would co-operate with the watchdog.

Hours later, White Oak changed its tune, saying it was continuing talks to refinance the debt of Gupta’s Primary Metals Australia business. 

Now it’s going further. White Oak is in talks about refinancing Gupta’s European operations too, potentially via the creation of a separate trading entity, DD’s Rob Smith and the FT’s Sylvia Pfeifer report

The US group is no disinterested party. It has existing exposure to GFG and has previously provided financing directly to Gupta’s Liberty Steel business.

It also agreed last year to buy some of the now-collapsed finance firm Greensill Capital’s exposure to Gupta’s commodities business, as Greensill came under pressure for being too closely tied to the metals magnate’s company. 

That was structured through complicated deals that provided an option for Greensill to later buy it back. Catch up on White Oak’s entanglement in the Greensill-Gupta story with this FT deep dive. 

Job moves

  • EasyJet has appointed Stephen Hester as chair. The former Royal Bank of Scotland boss, who will succeed John Barton, has signed up for an annual pay package of £314,568 a year. More here

  • UK prime minister Boris Johnson has appointed former cricketer Lord Ian Botham to lead a trade mission to Australia. He will head a delegation that includes law firms, carmakers and whisky distillers. More here.

  • Linklaters has appointed Alison Wilson as global head of dispute resolution, replacing Michael Bennett. Andy Vickery will replace Paul Lewis as global head of finance. Wilson and Vickery joined the law firm in 2003 and will be based in London.

Smart reads

Conflict of interest Ford Foundation president Darren Walker has long advocated for workers’ rights. As hundreds of employees strike against Frito-Lay — a subsidiary of PepsiCo, which he sits on the board of — he has found himself in a sticky situation. (FT)

‘They cut my equity’ Why some staff at Ari Emanuel’s entertainment and media agency, Endeavor, are angry with their boss after its initial public offering this spring. (New York Post)

Barriers to entry US payments groups, including Mastercard, were elated when India’s prime minister Narendra Modi pushed for more electronic payments in the cash-dominated country. But the administration’s strict data regulations have hampered their plans. (FT

News round-up

KKR leads $3.7bn deal for Australia’s Spark Infrastructure (FT)

Anti-money laundering fines surge as watchdogs impose tougher penalties (FT)

Juul, other e-cigarette makers face judgment day (Wall Street Journal)

Citadel to redeem about $500m from Melvin Capital (WSJ)

Pfizer to buy oncology biotech in $2.3bn deal (FT)

Virgin Orbit brings Boeing on board for $3.2bn Spac deal (FT) owner nets Italy’s top football site (FT)

Vox Media acquires cocktail media brand “Punch” (Axios)

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