Takeovers and a weak pound put UK aerospace and defense in the spotlight

The UK aerospace and defense sector is a rare bright spot, having bucked the shrinking trend of the country’s manufacturing base for more than 30 years, with a core group of heavyweights including BAE Systems and Rolls-Royce surrounded by a cluster of key suppliers.

But over the past three years, several of those suppliers — Cobham, Meggitt and Ultra Electronics — have fallen for bids from overseas applicants. Ultra and Meggitt have been withdrawn from the London market in the last two months. In September, another mainstay – the private company Pearson Engineering based in Newcastle – was sold to an Israeli company.

Shrinking British ownership of a vital industrial sector has reignited debate over its long-term prospects. Businesses still recovering from the Covid-19 pandemic are facing fresh headwinds in the form of inflation and rising interest rates, while sterling’s weakness has raised expectations that more groups will fall victim to applicants.

Kevin Craven, chief executive of ADS, the aerospace industry trade group, said he expected more British companies to attract interest from overseas.

“The weak pound, added to the UK’s attractive technical prowess, means there will be a higher crowd [takeover activity]. I expect there will be more interest from overseas buyers,” he said.

A Meggitt employee repairs a bottle used to fight fires on airplanes

A Meggitt employee repairs a bottle used to fight fires on airplanes. The company was taken over by the US group Parker Hannifin in September 2022

Sir Nigel Rudd, who sold Boots and Meggitt as chairman, said he expected successful companies to remain vulnerable.

He added that there were two major issues driving the takeover rush in the UK markets: valuations of similar companies in the US are typically 20-30% higher than UK peers, and UK investors “hate debt”.

“The problem is that British companies cannot buy US companies. You don’t have the firepower to do it. . . And typically UK investors are quite risk averse.”

Even before the pandemic, the UK’s position as the world’s most important aerospace and defense market after the US was weakened by Brexit. Aside from the extra bureaucracy, the UK has been excluded from key EU-wide research programmes.

New figures Industry body ADS show that the UK’s civil and military aerospace activities generated revenue of £22.4 billion in 2021 – down 37 per cent from before the coronavirus crisis.

In contrast, although affected by the pandemic, data from Germany’s business association show the sector, which has lagged the UK for decades, has cemented its recent lead with revenues of €31.4bn, or £27.8bn, in 2021.

Craven said the UK figures still reflect the impact of Covid-19 and stressed there was no evidence of a “structural shift or reduction in Britain’s competitiveness”.

But a challenge for UK companies is the skills shortage, with some groups struggling to rehire staff while the aerospace market recovers, he said.

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Craven also warned against a “knee-jerk reaction” that all takeovers are “a bad thing”, noting that the focus should be on “ensuring key assets are preserved in the UK with the right assurances for integration [with the acquiring company’s operations] that could happen”.

In the Meggitt and Ultra cases, the government reviewed both acquisitions before finally giving the green light after receiving a series of commitments from the respective buyers.

Both American Parker Hannifin, which acquired Meggitt, and private equity-backed Cobham, which bought Ultra, have pledged to protect sensitive technology and increase R&D spending.

The acquisition of Ultra, which makes anti-submarine warfare equipment as well as control systems for the fleet of Trident submarines carrying the UK’s nuclear deterrent, has raised particular national security concerns.

Meanwhile, Israel’s Rafael Advanced Defense Systems, which acquired Pearson Engineering, said the deal would result in an increase in jobs in Newcastle.

Still, some industry experts question whether the takeover rush could lead to an erosion of the industry’s tightly-knit supply chains.

Others worry that key research and development into electric and hydrogen aviation technologies in the UK may not take place unless owners make long-term commitments.

In aerospace, this year the government has allocated more funding to the development of new technologies through the Aerospace Technology Institute, established in 2014 to provide state funding for innovation in the sector.

However, some industry executives stress that greater funding will be needed to meet the UK’s ambitions of becoming a leader in net-zero aviation.

“Not only has the UK made itself a lot less attractive as a manufacturing location because of things like extra paperwork because of Brexit, but it has also gotten itself out of all EU-funded R&D programmes,” said a former small business owner.

Paul Everitt, former chief executive of ADS, said the UK is a strong player in the industry with big global companies including BAE and Babcock International and foreign investment from leading European groups like Airbus and Leonardo. But added that the UK faces challenges “further down the supply chain”.

“Meggitt, Ultra and others were the route to market for the smaller manufacturing and engineering companies in the UK,” he said.

In defense, several executives said the government needs to encourage a more focused approach to procurement, reward UK-based companies and offer a reliable stream of contracts. This, they said, would help spur innovation and domestic capabilities.

“Because sterling is so cheap it leaves many British companies vulnerable to takeovers and the government must insist that research and development activities remain in the UK,” said Kevan Jones, a Labor member of the House of Commons Defense Committee.

https://www.ft.com/content/da3d0aff-d41f-4696-9482-3c4dac7318c3 Takeovers and a weak pound put UK aerospace and defense in the spotlight

Adam Bradshaw

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