The UK government is set to wave through a £2.6bn takeover of a British defence manufacturer in a deal that will move a US private equity investor a step closer to controlling a significant supplier of nuclear submarine equipment.
Cobham has received the green light to take over Ultra Electronics, a FTSE 250 maker of systems such as sonar and radio communications used by navies and air forces, as well as civilian aircraft. Cobham was itself controversially taken over and broken up by US private equity investor Advent over the course of 2019 and 2020.
The business secretary, Kwasi Kwarteng, announced on Thursday that he is “minded to accept undertakings offered” by a Cobham/Advent investment vehicle to address national security concerns.
The government intervened in the deal in August last year, amid concerns over a series of approaches for British aerospace and defence manufacturers during the aftermath of pandemic lockdowns. As well as Ultra, the government is also looking into the £6.3bn takeover of Meggitt, the maker of wheels and brakes for fighter jets, by US aerospace group Parker Hannifin, and the £5.4bn deal for satellite company Inmarsat by US rival Viasat.
Under the terms announced on Thursday, Cobham will have to create two “SecureCos” to house “sensitive capabilities”. The government will have a seat on the boards of these companies and will be given approval of their articles of association.
Most notably, the government will also have “step-in rights”, which would allow it to take control of the SecureCos on national security grounds. The government likened this to a “special share” that allows it to reject changes of strategy by BAE Systems and Rolls-Royce, the two most important UK weapons suppliers.
Kwarteng’s decision on the national security implications of the deal is separate to any economic considerations, although it is not thought likely that the government will require major concessions from Cobham on that front.
Lady Cobham, the daughter-in-law of Cobham’s founder, Alan Cobham, last week told the Mail on Sunday that Kwarteng should prevent the UK “auctioning off” its defence capabilities, and Labour has also previously raised concerns over the sell-off of British defence companies.
Shonnel Malani, chairman of Cobham, said the decision was “a positive step for investment in Ultra and in the Five Eyes alliance”, referring to the intelligence-sharing arrangement between Australia, Canada, New Zealand, the UK and the US.
“We have always been clear about our unwavering commitment to ensuring that UK’s national security is protected and believe these very extensive and robust undertakings will do just that,” he said.