Security test for UK deals: At last, the Government looks prepared to take on the predators, says ALEX BRUMMER
Overseas and private equity buyers of British firms will face formidable new obstacles from January when the UK National Security and Investment Act comes into force.
This follows a record-breaking year for buyouts with the value of deals involving UK companies hitting £470billion.
The law’s robust powers are designed to stop companies critical to national and economic security falling into unsafe hands.
Takeover frenzy: The UK National Security and Investment Act will come into force in January
The current free-for-all has seen swathes of the country’s infrastructure such as water companies, ports and airports fall into foreign hands, weakening the command and control of vital services.
As seriously, there has been a dramatic loss of intellectual property, patents and vital technologies – much of it the result of work done in the nation’s great research universities.
The powers become effective on January 4 and there already are indications that Boris Johnson’s government intends to use them forcefully.
The speed with which it warned French-Israeli telecoms entrepreneur Patrick Drahi against taking creeping control of BT, after lifting his stake to 18 per cent this month, was a shot across the bows.
The terms of the intervention were intriguing. Officials warned against anything which might interfere with the Levelling Up agenda through investment in digital infrastructure.
BT has pledged to spend £12billion bringing super-fast fibre to 20m homes. The plan has become ever more critical with the rapid rise of hybrid working during the pandemic.
The Government finds itself on the horns of a dilemma. It came to office preaching a global Britain agenda.
Foreign Secretary Liz Truss, in her previous role as international trade secretary, stuck with the task – concluding a rapid fire series of trade agreements including with Japan and Australia.
The imperative to boost trade with the rest of the world has been exacerbated by Covid and Brexit. Exports to the EU were down by 13 per cent, or £18billion, in the first ten months of 2021 compared to 2019.
It would be worrying if the NSI Act was to be seen overseas as eroding Britain’s commitment to an open, free market economy which welcomes inward investment.
But as the buyouts and bids gathered momentum last year there has been greater determination in Downing Street to act against the predators.
Seemingly done deals – such as the takeover of aerospace and engineering firm Meggitt – have been halted by referral to the Competition and Markets Authority (CMA).
The proposed £40billion takeover of Softbank-owned Arm Holdings by American rival semi-conductor rival Nvidia also has gone to the CMA.
Opinion has moved a long way from when Theresa May’s government saw the Softbank bid for Arm as a vote of confidence in Britain.
The then Business Secretary Andrea Leadsom infamously refused to step in to protect aerospace pioneer Cobham. The company was hurriedly dismantled and sold off by private equity buyer Advent.
The assault on UK assets by foreign and financial buyers is largely blamed on the discount of UK equity markets to those overseas.
This has led to bidders paying what appear to be large premiums irresistible to big battalion investors and compliant boards. The NSI Act will complicate matters for shareholders and executives looking for quick gains.
Law firm Brown Rudnick, which specialises in competition issues, notes that the powers granted to ministers by NSI are sweeping in their breadth and exceed those deployed by the Committee on Foreign Investment in the US.
Among other things the new law grants powers to look at domestic takeovers. It could, for instance, been deployed to probe the hostile takeover of aerospace and automotive group GKN by Melrose in 2018.
What concerns Brown Rudnick partner Mark Dorff is ‘the lack of precision in government guidance’ about how and when government might intervene.
There are questions as to whether the authorities could intervene to block future share purchases. That would prevent Drahi from taking partial control of BT. It is unclear whether such purchases could be unwound retrospectively.
Takeovers in Britain famously have been governed through the common sense rulings of City referee the Takeover Panel. In future battles, the law could become far more intrusive.
Belatedly, the UK has put sand in the wheels of the bid pantechnicon.