Cobham: National security fears threaten defence takeover
18 September 2019
The government is to intervene in a US private equity firm's takeover of UK defence and aerospace firm Cobham, citing national security concerns. Advent International made a PS4bn offer to buy Cobham in July and shareholders approved the deal last month. But Cobham's founding family raised concerns about the company's future and its connections with UK defence. The government said it wanted to "support private sector innovation whilst safeguarding public interest". Dorset-based Cobham, which employs 10,000 people, is known for pioneering technology enabling the mid-air refuelling of planes. The firm also makes electronic warfare systems and communications for military vehicles. "Following careful consideration of the proposed takeover of Cobham, I have issued an intervention notice on the grounds of national security," said Business Secretary Andrea Leadsom. The Competition and Markets Authority (CMA) will investigate and carry out a review on the national security implications of the transaction. The government has the power to veto the deal if the CMA finds there are sufficient concerns. It must report the results of its decision by 29 October. Since 2002, the government is thought to have made 16 interventions on takeovers, nine of which were due to national security concerns. None of these deals have so far been blocked. "Advent is committed to being a responsible steward of Cobham, encouraging its future growth and success. We will continue to engage constructively and cooperatively with the UK government in this part of their review," said an Advent spokesperson. The defence technology firm has had a rocky time after issuing a series of profit warnings in 2016 and 2017, which required it to raise funds from its shareholders. Cobham has extensive contracts with the British military, including air-to-air plane refuelling, electronic warfare systems, and training military personnel to use software platforms in missile destroyers and fighter jets. Lady Nadine Cobham, 76, the widow of Sir Michael Cobham, who built up the firm over 25 years, recently spoke of her concerns about the takeover deal, telling the Mail on Sunday that Cobham "deserves to be protected" by the government. "It's an opportune moment for Advent to pounce and the reality is that Advent will break up Cobham and sell off its parts to the highest bidder. "This may well include air-to-air refuelling, which is a real shocker," she said. She also said she would not accept Advent's assurances that it would maintain Cobham's UK and US headquarters, as well as investing further into the firm's research and development efforts. Successive governments have shown themselves to be intensely relaxed about foreign ownership of important bits of British infrastructure. Our power and water supplies, ports and airports are all owned by overseas investors. That relaxed attitude has even extended to defence, particularly when the foreign owners are from allied countries. Boeing, the US defence contractor, provides all kinds of kit, including Chinook helicopters, to the UK armed forces, while the new F-35 Lightning, the cutting edge of the Royal Air Force, is made by another American contractor, Lockheed Martin. That's why this morning's intervention by Andrea Leadsom has taken many by surprise. There was no groundswell of public opinion against the Advent bid for Cobham, despite the best efforts of the founding family to whip one up. A US buyer for a supplier of defence kit might be thought not to raise many issues of national security. But City sources pointed out this morning that silence should not have been mistaken for a lack of activity. Mrs Leadsom could not have intervened while the bid was still live - governments hate to affect commercial processes - but she was free to do so once Cobham shareholders approved the deal on Monday. Meanwhile, defence experts say that Cobham's speciality, air-to-air refuelling, could well be seen as a matter of national security. It is impossible to fight a modern war without the ability to keep aircraft in the air for long periods of time. When the Royal Air Force had to find a way to attack the Port Stanley airfield at short notice during the Falklands War, Cobham engineers made it possible. Cobham is also the undisputed world leader in the field, something that gives UK industry a big entree to defence contracts round the world. Most think that in the end, the Advent deal will go through - but that the CMA investigation will result in legally binding undertakings that Cobham keep research and development capabilities here in the UK. Since 2002, the government is thought to have made 16 interventions on takeovers, nine of which were due to national security concerns. In July, the government chose to intervene in another defence and aerospace industry deal - the PS2.7bn acquisition of satellite communications operator Inmarsat by a consortium of private equity funds. That probe is still ongoing. The move came after new laws were introduced in November, making it easier for the authorities to block takeover bids where there is a risk of technology being acquired by foreign firms. Inmarsat operates satellites that manage critical government communications for the UK and several other countries, particularly in emergency services, naval operations and border control. So far the government has looked into nine takeover deals due to concerns over national security: - General Dynamics and Alvis (2004) - Finmeccanica and AgustaWestland (2004) - Finmeccanica's acquisition of parts of BAE Systems (2005) - Lockheed Martin and Insys Group (2005) - The General Electric Company and Smiths Aerospace (2007) - Atlas Elektronik UK's acquisition of QinetiQ's Under Water Systems division (2009) - Sepura and Hytera (2017) - Northern Aerospace and Gardner Aerospace (2018) - Inmarsat and Connect Bidco (2019)
"Following careful consideration of the proposed takeover of Cobham, I have issued an intervention notice on the grounds of national security," said Business Secretary Andrea Leadsom. The Competition and Markets Authority (CMA) will investigate and carry out a review on the national security implications of the transaction. The government has the power to veto the deal if the CMA finds there are sufficient concerns. It must report the results of its decision by 29 October. Since 2002, the government is thought to have made 16 interventions on takeovers, nine of which were due to national security concerns. None of these deals have so far been blocked. "Advent is committed to being a responsible steward of Cobham, encouraging its future growth and success. We will continue to engage constructively and cooperatively with the UK government in this part of their review," said an Advent spokesperson.
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What has the government said?
The defence technology firm has had a rocky time after issuing a series of profit warnings in 2016 and 2017, which required it to raise funds from its shareholders. Cobham has extensive contracts with the British military, including air-to-air plane refuelling, electronic warfare systems, and training military personnel to use software platforms in missile destroyers and fighter jets. Lady Nadine Cobham, 76, the widow of Sir Michael Cobham, who built up the firm over 25 years, recently spoke of her concerns about the takeover deal, telling the Mail on Sunday that Cobham "deserves to be protected" by the government. "It's an opportune moment for Advent to pounce and the reality is that Advent will break up Cobham and sell off its parts to the highest bidder. "This may well include air-to-air refuelling, which is a real shocker," she said. She also said she would not accept Advent's assurances that it would maintain Cobham's UK and US headquarters, as well as investing further into the firm's research and development efforts.
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Why is the deal controversial?
Successive governments have shown themselves to be intensely relaxed about foreign ownership of important bits of British infrastructure. Our power and water supplies, ports and airports are all owned by overseas investors. That relaxed attitude has even extended to defence, particularly when the foreign owners are from allied countries. Boeing, the US defence contractor, provides all kinds of kit, including Chinook helicopters, to the UK armed forces, while the new F-35 Lightning, the cutting edge of the Royal Air Force, is made by another American contractor, Lockheed Martin. That's why this morning's intervention by Andrea Leadsom has taken many by surprise. There was no groundswell of public opinion against the Advent bid for Cobham, despite the best efforts of the founding family to whip one up. A US buyer for a supplier of defence kit might be thought not to raise many issues of national security. But City sources pointed out this morning that silence should not have been mistaken for a lack of activity. Mrs Leadsom could not have intervened while the bid was still live - governments hate to affect commercial processes - but she was free to do so once Cobham shareholders approved the deal on Monday. Meanwhile, defence experts say that Cobham's speciality, air-to-air refuelling, could well be seen as a matter of national security. It is impossible to fight a modern war without the ability to keep aircraft in the air for long periods of time. When the Royal Air Force had to find a way to attack the Port Stanley airfield at short notice during the Falklands War, Cobham engineers made it possible. Cobham is also the undisputed world leader in the field, something that gives UK industry a big entree to defence contracts round the world. Most think that in the end, the Advent deal will go through - but that the CMA investigation will result in legally binding undertakings that Cobham keep research and development capabilities here in the UK.
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Will the deal eventually go through?
Since 2002, the government is thought to have made 16 interventions on takeovers, nine of which were due to national security concerns. In July, the government chose to intervene in another defence and aerospace industry deal - the PS2.7bn acquisition of satellite communications operator Inmarsat by a consortium of private equity funds. That probe is still ongoing. The move came after new laws were introduced in November, making it easier for the authorities to block takeover bids where there is a risk of technology being acquired by foreign firms. Inmarsat operates satellites that manage critical government communications for the UK and several other countries, particularly in emergency services, naval operations and border control.
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Does the government often intervene?
So far the government has looked into nine takeover deals due to concerns over national security: - General Dynamics and Alvis (2004) - Finmeccanica and AgustaWestland (2004) - Finmeccanica's acquisition of parts of BAE Systems (2005) - Lockheed Martin and Insys Group (2005) - The General Electric Company and Smiths Aerospace (2007) - Atlas Elektronik UK's acquisition of QinetiQ's Under Water Systems division (2009) - Sepura and Hytera (2017) - Northern Aerospace and Gardner Aerospace (2018) - Inmarsat and Connect Bidco (2019)
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What deals has the CMA previously investigated for national security concerns?