Yahoo Finance Fortress Britain: Foreign deals face Government crackdown
The omens were clear to investment bankers across the City even before Theresa May became Prime Minister.
It was last July and Mrs May had chosen the Institute of Engineering and Technology in Birmingham to launch her bid to succeed David Cameron. As she set out her vision for the UK, it quickly became apparent that she intended to make life much harder for financiers who work on mergers and acquisitions.
“As we saw when Cadbury’s – that great Birmingham company – was bought by Kraft, or when AstraZeneca was almost sold to Pfizer, transient shareholders, who are mostly companies investing other people’s money, are not the only people with an interest when firms are sold or close,” May said. “Workers have a stake, local communities have a stake, and often the whole country has a stake.”
While May conceded “a proper industrial strategy wouldn’t automatically stop the sale of British firms to foreign ones”, she also argued “it should be capable of stepping in to defend a sector that is as important as pharmaceuticals is to Britain”.
Ten months later and with a snap general election looming, May has promised to turn her vision of more active government involvement in deals into reality. The Conservative manifesto includes a raft of measures that will make it harder for overseas firms to buy British businesses, particularly those deemed to control “critical national infrastructure”.
The pledges have caused consternation in the City, and not just because they could complicate deal-making.
In the wake of last June’s vote to leave the EU, Mrs May and other ministers have been at pains to stress that Britain remains “open for business”. The protectionist slant of the Tory party’s promises on foreign takeovers – which are likely to be implemented given the party’s lead in the polls – appear to fly in the face of that mantra.
“The national debate on corporate control has been pretty settled for the best part of 30 years until last summer when Theresa May did her speech in Birmingham,” says a top M&A banker at an international firm. “It is much more protectionist in stance than any government I can think of.”
Revamping the regulations on deals is nothing new. The Takeover Code has been updated numerous times since the Takeover Panel, which oversees the rules, was set up in 1968. In recent years, particularly contentious deals have driven changes to the code. Public outcry in 2010 after American firm Kraft reneged on a pledge to keep open Cadbury’s factory at Somerdale, near Bristol, following its £11.9bn takeover, prompted one such overhaul.
A more radical revamp of takeover rules could now be on the horizon, however, which would change the UK’s reputation as being more open than many countries to cross-border deals. According to data from Dealogic, the UK is the top country in Europe for cross-border M&A, with 947 such deals for public and private companies last year.
The first batch of changes proposed by the Tories relate to deals by overseas bidders motivated by “asset-stripping or tax avoidance”, the manifesto says. They will “require bidders to be clear about their intentions from the outset of the bid process; that all promises and undertakings made in the course of takeover bids can be legally enforced afterwards; and that the Government can require a bid to be paused”.
A source close to the panel notes that the code already forces bidders to be transparent about their intentions. Furthermore, after Pfizer’s failed £69bn AstraZeneca approach, the panel was given the power to take legal action if “post-offer undertakings” are broken. It is possible the Tories now want these existing rules to be strengthened. The pledge to allow ministers to “pause” deals could be more wide-ranging and problematic, bankers say.
The code was changed after Kraft’s lengthy pursuit of Cadbury, introducing a 28-day deadline for suitors to either make a firm offer or walk away from a deal. The Tories’ proposal risks lengthening the bidding process so that target companies essentially come under siege from predators again, financiers have warned.
Also it potentially complicates M&A financing. Currently, bidders have to give “cash confirmation” for deals that are to be paid for wholly or in part with cash, as opposed to all-share offers. Pausing too long to allow government scrutiny could result in bank financing for a takeover to fall away, scuppering the deal, bankers warned.
Moreover, the second batch of proposals by the Tories tackle more broadly the issue of overseas control of important British assets. Taken together with the other planned changes, it sets up a potential clash with Mrs May’s declaration in Davos in January that Brexit is a chance to create a “truly global Britain”. As one senior financier focused on UK deals at a British bank says: “The words and the music don’t coincide on this one.”
According to the manifesto, the Tories “will ensure that foreign ownership of companies controlling important infrastructure does not undermine British security or essential services”. It highlights that steps were taken last September to give ministers greater scrutiny over the ownership of the Hinkley Point nuclear reactor being built by France’s EDF and Chinese state firm CGN and says a “similarly robust approach” will be taken “across a limited range of other sectors, such as telecoms, defence and energy”.
It marks a departure for Britain which, compared with other countries, has been remarkably welcoming to overseas investment, particularly in infrastructure.
“The UK has always been something of an anomaly in that it’s been as close as you can get to a genuinely open free market when it comes to selling assets,” says an infrastructure banker.
For example, Heathrow, Britain’s biggest airport, is controlled by a consortium that includes Spain’s Ferrovial, the Qatar Investment Authority and China Investment Corporation, while Canadian pension funds, Kuwait, and Singapore all own stakes in Associated British Ports.
Still, despite widespread foreign control of UK infrastructure, there are three areas of the corporate world where ministers wield considerable influence over who owns what. Under the Enterprise Act, the Government can apply public interest tests to deals that might threaten financial stability, national security and media plurality. Telecoms, defence and energy takeovers will now face more intense scrutiny if the Tories have their way.
It came as a surprise to executives at telecoms giant BT, who it is understood had no warning about the manifesto pledge. The Tory plans will also unsettle the many overseas firms that have been listening to government rhetoric about an open Britain after the Brexit vote.
“Any foreign business looking at making acquisitions in the UK will have a lot more doubt if this all comes to pass,” says the UK-focused banker.
Minutes after launching her leadership bid last July with a promise to look more closely at takeovers, Mrs May was unexpectedly handed the keys to Downing Street when her rival Andrea Leadsom pulled out of the race. A week later, Japan’s Softbank revealed its £24.3bn acquisition of Cambridge-based chip designer ARM Holdings.
Coming just a month after the EU referendum, the Government was at pains to welcome the deal as a signal the UK remained attractive to foreign investment despite the Brexit vote.
At the same time, however, there were also indications that the protectionist note sounded by Mrs May had perhaps struck a chord at Softbank. Masayoshi Son, the Japanese firm’s chief executive, spoke to the Prime Minister before the deal was publicly unveiled and reassured her Softbank would double the number of jobs at ARM in five years. It was precisely the sort of undertaking that is now a focus of the Tory manifesto.
While Mrs May was happy to praise the ARM deal and the Government denied that it intervened in Kraft Heinz’s aborted £115bn bid for Unilever in February, the tone of the Tories’ election pledges suggest they might not be as welcoming to other takeovers if re-elected.
“It puts much more of an onus on ‘does the Government like the cut of your jib?’” says the UK-focused banker.
