Cobham Takeover – national security under fire?
Monday 3rd February 2020
In July 2019, US-based private equity firm Advent International (through an indirect subsidiary of its funds) made a takeover offer for Cobham plc – a UK-based defence and aerospace manufacturing business known particularly as a leader in the air-to-air refuelling equipment market.
The takeover offer from Advent was recommended by Cobham’s board and subsequently received shareholder approval. The deal was completed in January 2020, but not before the takeover was investigated by the UK Competition and Markets Authority after the UK Government issued an intervention notice on national security grounds.
Throughout the process, Lady Nadine Cobham (daughter-in-law of the firm’s founder) made clear her concerns over the deal – particularly around whether a key British defence asset would be ‘lost’ to foreign ownership. The BBC noted that Cobham’s leading position in air-to-air refuelling technology at the global level can give the UK a key position of influence in defence contracts worldwide. With much of the UK’s current defence inventory being supplied by European or American contractors, Cobham may represent one of the last leading ‘home-grown’ British defence manufacturers.
Eventually, as predicted in September 2019 by BBC Business correspondent Dominic O’Connell, the deal was cleared by the UK Government (which has historically been highly reluctant to intervene in such commercial processes, even in regard to critical national infrastructure) subject to assurances being made by Cobham and Advent to the UK Government.
Relevant subsidiaries of Advent executed a Deed in favour of the UK Secretary of State for Business, Energy and Industrial Strategy in order to guarantee several aspects of the future of Cobham, including the strength of its UK workforce. Post-offer undertakings were also made to the Takeover Panel to maintain UK headquarters for several key aspects of Cobham’s business, maintain the use of the Cobham firm name, and protect the level of research and development (R&D) spending of Cobham in the UK.
Undertakings were also given to the Secretary of State under the Enterprise Act 2002 in order to ensure that Cobham remains compliant with any security requirements associated with being a high-level defence contractor, and to ensure more broadly that there would be protection of any sensitive information held by Cobham as a Government Contractor. In regard to the latter, this included (for so long as Cobham is such a contractor) ensuring that at least 50% of directors of relevant Cobham companies are UK nationals resident in the UK (unless UK Government permission is obtained), and that the Chairman of the Board of Cobham will be a British national.
What, then, does this mean for national security? The legally-binding assurances obtained by the UK Government from Cobham and Advent appear comprehensive. They cover Cobham’s level of UK employees, R&D spending, headquarters, and Board composition to name only a few areas. That being so, they were not enough to allay the concerns of Lady Nadine Cobham noted above.
This whole story is perhaps best understood in the context of successive UK Government’s generally laissez-faire approach to intervention in UK takeovers on national security grounds. The BBC reported in September 2019 that, since 2002, it is believed that the UK Government has made 16 such interventions. Nine of these were on national security grounds, but none of the takeovers concerned had yet been blocked.
After the announcement of the approval of the Cobham deal, UK Prime Minister Boris Johnson said he thought it was “very important that we should have an open and dynamic market economy”, but also stressed the checks needed to deal with any national security issues.
Ultimately, national security always will (and should) be a primary concern for any Government. The receipt of legally-binding undertakings to this effect in takeovers such as this is the most pragmatic way to minimise any potential risks whilst also ensuring, as the Prime Minister noted, that the right signals of openness are sent to potential investors into the UK economy.
In regard to the defence sector in this context, today there is increasing collaboration between military allies in order to deliver defence contracts. The US-UK relationship here is perhaps one of the most well-established in the world. Flagship defence projects such as the F-35 Lightning jet involve lead contractors from both nations. In this context, taken alongside the assurances noted above, perhaps deals such as the Advent acquisition of Cobham are natural and unproblematic – the parties being based in countries that are military allies.
Cobham has a distinguished history as a British company from the post-war years, to the Falklands War, and on into the 21st century. Those who wish to see such a business continue to be independently ‘British-owned’ will of course be disappointed by this deal. However, from the wider perspective of balancing British national security and free market openness, it seems the Government has taken a pragmatic and sensible approach that should be commended.
