My letter to the Business Secretary regarding the takeover of Cobham by Advent
When it comes to the takeover bid by Advent International for the great British defence and aerospace firm Cobham Pls, all we've seen is industrial passivism from a government ignoring the alarm bells. Here's my letter today to the Business Secretary about it:
Dear Secretary of State,
Call to action with regard to the proposed takeover of Cobham Plc by Advent International
I write with regard to the takeover bid by Advent International (“Advent”) for Cobham Plc (“Cobham), the British defence and aerospace company. Advent is a US corporation which describes itself as “one of the largest and most experienced global private equity firms.”
On 25 July 2019 Cobham announced to the market that the boards of Cobham and Advent have reached an agreement on the takeover under which there would be a cash acquisition of the entire share capital of Cobham by Advent. The offer period has commenced, and the takeover process is ongoing.
The government’s industrial passivism
Shortly after the announcement of the bid your department put out a statement in which it said, “this is a commercial matter for the companies involved” and that the department would simply be “monitoring the transaction.” Adopting such a passive approach is not in keeping with the stated purpose of the department. The clue is in the department’s name – it is supposed to be spearheading the country’s “industrial strategy” not acting as an observer from a distance.
The current Chancellor, when he served in your role, preferred to talk about “industrial policy” as opposed to a implementing a full throated “industrial strategy” necessitating industrial activism on the part of Ministers. Given the huge burden being imposed on business by HM Government’s (“the government’s”) policy to take Britain out of the European Union without a deal, the need for government to step up to mitigate the damage it is doing to the business environment has never been greater.
A great British success story
Cobham is no ordinary company. The company is a great British success story with a proud history, having been founded in 1935 by Sir Alan Cobham, an aviation pioneer and significant contributor to air mobility through his aerial refuelling experiments.
It is valued at £4 billion, employs around 10,000 people and has customers and partners in over 100 countries, including 1,700 employees in the UK.
It has specialist capabilities and know-how in: wireless; audio; video and data communications, including satellite communications; defence electronics; air-to-air refuelling; aviation services; life support and mission equipment markets. Many of the world’s best-known aircraft, including the F-35 and all Airbus platforms, feature Cobham technology. As such, Cobham is a key part of several sectors in which the UK is a global leader.
Importantly, Cobham provides operational readiness training for our armed forces and NATO air, land and maritime forces. Its air-to-air refuelling equipment proved vital to the UK armed forces in the Falklands War. Consequently, a large part of its revenue flows from contracts with Ministry of Defence.
Alarm bells being ignored
Cobham’s largest shareholder, Silchester International, which owns 11.86% of the company has voiced its opposition to the takeover primarily because it believes it to be underpriced. This suggests one of the jewels in the crown of the UK’s industrial base is being sold on the cheap.
Lady Nadine Cobham – her late husband was son of Sir Alan – has already written to you and the Defence Secretary this month asking for you to intervene warning “this acquisition is absolutely not in our national interest”. Her family own 1.5% of the company and have argued that this transaction will erode our defence industry and put our national security at risk.
ADS Group - which represents over 1000 businesses in our aerospace, defence and security sectors - has made clear Cobham is of strategic importance both to our industrial base and our national security. Its CEO has said “the new government should secure appropriate commitments from its buyers.”
It has also been reported that Advent has already conceded in documents that at least 100 jobs are at risk as a result of the transaction.
The alarm bells are ringing and yet the government has chosen to ignore them and gives the appearance of having abandoned this important industrial asset. The silence from Ministers in the wake of the news of this bid is deafening.
In light of Cobham’s importance to the UK, acting as a bystander in the way the government appears to be doing is a dereliction of duty. This transaction is a matter of legitimate public interest and, accordingly, it is appropriate for the government to intervene to safeguard our national strategic interests. We ask that you and your department do the following:
1. Under the Enterprise Act 2002, you have the power to intervene on grounds of national security in transactions such as this. Is your department carrying out an assessment of the national security implications of this transaction? If so, when will you announce your findings? Action is needed.
2. What commitments will you seek to secure from Advent in relation to its bid. Last year your immediate predecessor was moved to act in the takeover of another great British engineering company, the automotive and aerospace company GKN Plc, by Melrose Industries Plc. He demanded binding commitments from Melrose in respect of GKN’s future and our national security. As a minimum, if you are not minded to block this takeover, the government should seek relevant undertakings from Advent in relation to their continued commitment to jobs and investment in the UK.
3. It is time for the scope of the public interest concerns under which government may intervene in takeovers to be strengthened to include protecting the UK’s innovation, R&D and science base. This is a classic case where it may be under threat as Cobham becomes part of a group with a primary focus on the US to the detriment of its UK operations. I made this argument at the time of US pharmaceutical firm Pfizer’s failed bid for AstraZeneca in 2014 – the case has only grown stronger since.
4. Too many transactions such as this are financed by debt which is then secured against the target company. I understand a substantial amount of debt financing will be used to fund this deal. Excessive debt can reduce risk for the purchaser but increase risk and instability for the target. Those who finance takeovers in this way should have a higher burden of explanation: what is their planned route to greater success? How likely is it that the company they are buying will perform so much better than before now that it is encumbered with so much debt? There can also be real public costs to excessively leveraged deals because takeovers which load the target company with debt have the effect of depriving the Exchequer of future tax revenues. Excessive leverage should act as a trigger for additional scrutiny by the Competition & Markets Authority.
For the avoidance of doubt, we believe foreign direct investment is vitally important for UK industry, manufacturing, and the broader economy. The issue with this deal is not that Cobham faces being bought by a foreign company but that this particular purchase has a material impact on the UK’s national security and manufacturing base.
Given the weakness of sterling that has arisen as a direct consequence of the government’s Brexit policy, British companies are becoming increasingly exposed to the risk of takeover by foreign companies wanting to make a fast-buck, who do not prioritise the long-term interests of the company, its employees or other stakeholders.
It is vital that you and your department now act as matter of urgency in relation to this takeover.
I look forward to receiving your response.
Chuka Umunna MP
Liberal Democrat Spokesperson for Treasury and Business Issues
Member of Parliament for Streatham
Representing Streatham and parts of Balham, Brixton, Clapham and Tulse Hill