Kwasi Kwarteng intervenes in takeover bid of UK defence firm Ultra Electronics
Competition regulator to look at whether merger with US private equity-owned Cobham is national security risk
Last modified on Wed 18 Aug 2021 14.52 EDT
The takeover of the British defence firm Ultra Electronics by a US private equity company will be investigated on national security grounds, after the business minister, Kwasi Kwarteng, told the competition regulator to examine the deal.
Warning that foreign investment “must not threaten national security”, Kwarteng tabled an order in parliament preventing Ultra from disclosing “sensitive information” to Cobham, the defence firm behind the £2.6bn takeover bid. He said Ultra would be prevented from passing on details of the “goods or services it provides to HM Government or HM Armed Forces”, while the Competition and Markets Authority (CMA) examined the deal.
The official intervention notice came after pressure from Labour and trade unions to intervene in the takeover bid by Cobham, which is based in Dorset and which was itself bought last year by the US buyout house Advent for £4bn.
Steve Turner, assistant general secretary of the trade union Unite, said: “The government’s action with regards to the sale of Ultra Electronics is significant and is a step in the right direction.” But he said the government must not “just talk tough” but should take steps to stop the sale to “overseas venture capitalists” of Ultra as well as the defence manufacturer Meggitt.
Based in Coventry, Meggitt, which makes wheels and brakes for military fighter jets, is being pursued by two US aerospace companies, Parker Hannifin and TransDigm, and appears to be on the verge of a £7bn sale.
“This is an issue of national security and it is to be hoped that the government has finally woken up to the threat to the UK’s sovereign defence capability, as well as to skills and jobs, posed by venture capitalists who are primarily motivated by short-term profits,” Turner said.
The shadow business minister, Chi Onwurah, earlier called on the government to do more than make “weak and vague” noises about the prospective takeover of Ultra.
Kwarteng, announcing the intervention on Twitter, said: “The UK is open for business, however foreign investment must not threaten our national security.”
The government can intervene in takeovers for limited reasons, including media plurality, economic stability, the UK’s ability to fight pandemics and national security. In an official notice, the Department for Business, Energy and Industrial Strategy said the deal would be investigated by the CMA on national security grounds.
Ultra Electronics is integral to the operations of the British armed forces, specialising in hi-tech systems that offer an advantage in the air, on land and at sea, through the detection of emerging threats. Its products include systems to help detect improvised explosive devices and intercept communications, used in Afghanistan.
Britain's most controversial private equity buyouts
Boots
The
British chemist, which traces its roots to the 1830s in Nottingham, was
the first FTSE 100 firm to go private when it was snapped up for £11bn
in 2007.
The deal, which still holds the record
as the UK’s largest private equity buyout, was backed by Kohlberg
Kravis Roberts (KKR), and led by billionaire Stefano Pessina, now the
pharmacy chain’s executive chairman.
Boots was
saddled with £9bn of debt as part of the leveraged buyout, in which KKR
and Pessina put in £2.5bn of their own cash and borrowed the rest from
investment banks. Just days after deal closed, Alliance Boots paid a
£1.55bn dividend to a holding company, though a spokesperson at the time
said the money remained within the company and had not been paid out to
the new owners. The costs of servicing its debt pile in those first few
months were estimated at £65m a month.
The
deal also led to the group shifting the headquarters of its holding
company, Alliance Boots, to Switzerland, a decision which has been
criticised for costing the UK million of pounds in tax revenue, but
which the company has denied was motivated by tax savings. Boots’
headquarters remain in Nottingham.
The firm was
eventually sold off to America’s largest pharmacy chain, Walgreens,
headquartered in Delaware, in a $15bn (£10.8bn) deal that was completed
in 2014. Pessina, who invested an estimated £1.25bn of his own capital
in the 2007 deal, was previously estimated to have gained 214m shares in
Walgreens, worth an estimated £11.5bn, as part of the sale.
Debenhams
Debenhams was taken over by a consortium of private equity funds – TPG, CVC Capital and Merrill Lynch – for £1.7bn in 2003.
Executives
installed to overhaul Debenhams were tasked with slashing costs while
increasing sales and profit margins. It meant remortgaging some of the
stores to save on borrowing costs, and selling 23 shops to British Land
in 2005 for £495m, which were then leased back on expensive rent deals
up to 35 years long. The proceeds were paid to the private equity
investors.
The chain also started regularly
discounting items to shift stock that did not sell, a move which has
been blamed for dragging the brand downmarket.
The trio made huge returns on their £600m investment, having borrowed most of the money used to clinch the deal.
They
collected £1.2bn in dividends despite owning the company for less than
three years, and critics say they profited from what is known as a
“quick flip”: buying a listed business cheaply, loading it with debt and
then refloating it at a big profit. The company, which owed just £100m
when it was taken private, saw its debts surge to £1bn by the time it
was returned to the stock market in a £3bn float in 2006.
Analysts
have said that in its weakened state, Debenhams failed to generate
enough revenue to reinvest in the business, a problem which eventually
led the company to close its doors earlier this year.
EMI
EMI
was the fourth largest record label and largest music publisher in the
world by the time Guy Hands’ private equity vehicle Terra Firma bought
the company in a £4.2bn deal in 2007. Terra Firma put in £2bn of its own
capital, while Citigroup, which advised on the deal, committed to
taking on the debt.
The private equity house
described EMI – which owned Abbey Road studios and was then home to
artists such as Kylie Minogue, Norah Jones, Iron Maiden and Coldplay –
as an “asset rich business” that needed to “substantially” cut costs and
shift its focus from producing music hits to managing music rights. It
went on to make major changes to senior management and by early 2008
announced it was making 2,000 of EMI’s 5,600 staff redundant.
Meanwhile,
Hands’ firm was finding it harder to meet loan conditions set by
Citigroup, which Terra Firma says became more “onerous” during the 2008
banking crash. The company’s financial troubles escalated and in
November 2009 EMI was in a standoff with the UK pensions regulator,
which eventually ordered it to pay £200m in to the staff retirement scheme.
A
month later, Terra Firma filed a lawsuit against Citigroup, alleging it
had driven up EMI’s sale price by suggesting there was another party
interested in the company before the sale. But the jury ruled against
Hands, saying he wasn’t fooled into paying an inflated price for the
business. Hands launched and abandoned a second £1.5bn lawsuit against
Citigroup six years later, claiming he personally lost €200m through the
deal.
Hands surrendered control of EMI to
bankers at Citigroup in 2011, after failing to keep up with its debts.
EMI was eventually split up, with its recorded music unit sold to Universal for £1.2bn in 2011, and its music publishing division to Sony for $2.3bn (£1.7bn) in 2018.
Cobham had sought to allay concerns about the deal by offering the UK government binding commitments. It said it would promise to protect sovereign defence capabilities, as well as funding of the company’s pension scheme and investment in the UK. It also promised to protect UK manufacturing jobs and invest in research. These pledges would be monitored through a “forum” with government officials.
But Cobham acknowledged it could sell Ultra’s forensics and energy businesses, while “limited numbers” of jobs, mostly linked to the firm’s stock market listing, may be lost.
Paul Myners, the former City minister, has cast doubt on the value of promises made by companies seeking to secure takeovers. “These things are not enforceable, they mean nothing and they’re normally time-limited,” he said.
Should the takeovers of Ultra and Meggitt go ahead, it would extend a buying spree in 2021 in which overseas buyers, many of them US private equity firms, have targeted British business. American buyout specialists have spent nearly £25bn so far in 2021, compared with £28bn last year, £30bn in 2019 and nearly £15bn in 2018, according to the financial data provider Dealogic.
US private equity firms have bought or approached a series of British companies, including the supermarkets Asda and Morrisons, the roadside assistance company the AA, the infrastructure firm John Laing and the insurer LV=, among others.
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