UK government must play defence on Ultra takeover
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The UK government is doing a lot of monitoring.
Business secretary Kwasi Kwarteng has said he is “monitoring the situation” around supermarket Wm Morrison. When it comes to inhaler company Vectura, he asked officials to monitor it. Takeover interest for defence company Meggitt is being “closely” monitored. As is Ultra Electronics, which on Monday agreed a £2.6bn takeover by Cobham, the aerospace and defence group owned by US private equity firm Advent.
What this actually means is anyone’s guess. These deals are being assessed under the old regime, with the tougher National Security and Investment Act rules (and retrospective powers) coming into force in January. Those were a response to rising intervention in deals internationally, as well as outcry over foreign, ill-fated takeovers of companies such as Cadbury and Arm.
This latest bout of political speak, though, covers everything from, “of course we’re not going to intervene but we need to say we’re doing something” through to “this presents serious concerns and is going to get the full treatment”.
If Ultra doesn’t qualify for the latter, then you wonder what the point of the government’s beefed-up rules on inward investment really was. Rarely has a deal been such an obvious candidate to be reviewed, restricted and potentially blocked.
Ultra provides crucial technology to the Ministry of Defence, from sonar-enabled buoys for the detection of submarines to control panels for the UK’s nuclear deterrent fleet. The UK may not be Ultra’s biggest customer; 60 per cent of sales are in the US. But a third of assets and capital investment at present are here.
The UK government isn’t just a big customer, it may well have helped fund the development of this technology. And there is good reason to keep it within the MoD’s sphere of influence: UK defence groups including Ultra were called upon to produce bespoke technology at speed for the conflicts in Afghanistan and Iraq, says Nick Cunningham, analyst at Agency Partners.
Yes, the US is an ally. But it is also proprietorial about US-based defence technologies. That arguably limits the benefits from common ownership of US and UK-based businesses in this sector in any case.
You can’t really blame Ultra’s board for acquiescing to a deal at a record price, which values the company at more than 17 times this year’s ebitda compared with the 13 times that Advent paid for Cobham in 2019. The need to take into account stakeholders beyond investors is rather different when the key one, who should share concerns about keeping jobs and skills in this country, has an effective right of veto.
And the government should be sceptical. Advent sold half of Cobham, measured by the value of the businesses, within 18 months of the deal. The company may claim a better strategic fit between Ultra’s units and what remains of Cobham. But a financial investor will always be looking for ways to take money off the table and, ultimately, for their exit. The fact that Advent has stood by the commitments made when it bought Cobham only shows that they were inadequate to begin with.
The starting point on Ultra doesn’t look much better. The vague areas for discussion with the government lacked timeframes, figures or a commitment not to flip assets on. According to people familiar with the matter, Advent and Cobham haven’t engaged with the business department’s screening unit, which is operating ahead of the new regime in January and intended to enable early co-operation. In any case, its woolly jumping-off point for government talks already compares unfavourably with US strategic buyer Parker Hannifin’s for Meggitt.
One thing seems pretty clear. The fears that strengthened government oversight would have a “chilling effect” on dealmaking were unfounded, given the frenzy of bids for UK companies. A dose of political uncertainty is apparently no match for the cheaper valuations offered by the UK market, and cheap funding offered by just about everyone.
Perhaps buyers have looked at a government and business secretary whose instincts tend towards the laissez-faire when it comes to foreign investment and concluded that it’s business as usual. If ever there was going to be one, Ultra is the case to prove them wrong.