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 afternoon, I instructed the @CMAgovUK to investigate the proposed acquisition of Ultra Electronics by Cobham to assess any national security concerns
— Kwasi Kwarteng (@KwasiKwarteng) August 18, 2021
The UK is open for business, however foreign investment must not threaten our national security
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“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.
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.
