Defence marketplace currently looks like one in which the UK sells companies and the US buys them
Last modified on Mon 16 Aug 2021 14.42 EDT
First Cobham, now Ultra Electronics, and Meggitt still to come. The sense of the UK’s defence industry being re-ordered and re-parcelled for the benefit of US private equity players and large US corporates is overwhelming.
While it would be absurd to say takeovers in the sector should never be allowed to happen, the bit that is missing in the current rush of deal-making is any sign of strategic thinking on the part of the UK government.
Does the business department or the Ministry of Defence think it important to have a thriving UK-owned specialist defence industry or not? Is there any point at which it would try to slow the current US-led takeover spree? What was the point of beefing up the government’s powers via the National Security and Investment Act, which comes into force next year?
In its last UK adventure in late-2019, Advent International paid £4bn for Cobham, signed up to the security conditions set by government, and promptly sold half the company within 18 months. Cobham Mission Systems, the air-to-air refuelling business regarded as the prime asset, went to Eaton Corporation of the US for $2.8bn (£2bn). The antennas and radios operation was bought by TransDigm, one of the two Ohio-based firms chasing Meggitt.
There is no suggestion that Advent played fast and loose with its undertakings, it should be said. The UK government had full visibility on the disposals and could have objected if it had wished. The new American owners may even be sincere in their own pledges to keep investing in the UK operations.
Yet the issue is the cumulative effect of takeovers on the broader UK defence industry, supposedly a source of national competitive advantage. Advent, via what’s left of Cobham, is now back for a £2.6bn tilt at Ultra, a company that could be considered even more integral to the UK defence industry since its submarine-hunting sonar technology is an important piece of kit for the Royal Navy.
Once again, the pitch is that there’s nothing to worry about because the buyer will make “legally binding commitments which safeguard Ultra’s contribution to the UK economy and national security”. Yet such intentions – covering sovereign capability, investment and jobs – are obviously not intended to last forever and all one really knows about Advent is that it’s a long-term seller, because that’s what private equity does.
Thus the most likely eventual outcome is that Ultra and, merged with the rump of Cobham, will then find its way to a deep-pocketed US defence company. Advent may be able to claim it has improved the merged operations along the way with its talk of deeper “customer intimacy” and greater clout in the specialist field of defence electronics. But, at the second turn of the dial and after the passage of time, the UK’s ability to extract concessions and guarantees will be reduced.
The official line on the Ultra deal is that the government “continues to closely monitor the proposed acquisition”. Kwasi Kwarteng, the business secretary, would do better to open a broader review into the resilience of the UK defence sector. Yes, the UK must be “an attractive place to do business”, as his department also says, but the defence marketplace currently looks like one in which the UK sells companies and the US buys them.
Each deal is different and one should resist blanket judgments, but the trend is the factor to focus on. It is hard to see how the UK’s national interest is being advanced by a one-way process that is being driven primarily by access to cheap money. If the UK government ever intends to use a proposed defence takeover as a trigger for a wider review, Ultra is the one to choose.
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