UK monitoring sale of military supplier Ultra to firm backed by US equity

The UK government has signalled that it is monitoring the sale of a key military supplier to a firm backed by US private equity amid concerns over the potential impact on national security.

The business secretary, Kwasi Kwarteng, is understood to have instructed Whitehall officials to keep close tabs on the multibillion-pound takeover bid of Ultra Electronics lodged by Cobham, which is owned by the American private equity group Advent.

On Friday Ultra said it was “minded to recommend” that shareholders back the Cobham deal, as the latest in a private equity shopping spree focused on British firms.

Ultra, which employs about 1,700 UK workers, makes sonobuoys – floating sonar detection devices dropped from submarine-hunting planes – and other classified sonar equipment for the Royal Navy, as well as civilian aircraft systems.

While the US is a close military ally of the UK, concerns centre on whether the sale would diminish British-owned defence manufacturing capabilities.

Cobham’s courtship of Ultra started in late June, with an offer that valued the company at £2.1bn. Ultra rejected that bid, but said it would probably succumb to a higher offer of £35 per share that valued it at £2.6bn.

“Given the sensitivities of this proposed deal, the business secretary is definitely taking an active interest,” said a source close to Kwarteng. “While no decisions have been taken, we’ll continue to monitor the transaction closely.”

The news comes after UK government sources also signalled they could block China’s state-owned nuclear energy company from building a nuclear reactor in Britain, again on national security grounds.

Boris Johnson’s government has started to take a more muscular attitude towards foreign ownership of sensitive defence and nuclear assets. However, it has proven difficult at times to strike a balance between the prime minister’s desire to oversee a “global Britain” that is open to investment from all over the globe, while at the same time trying to protect British jobs.

Johnson’s government previously waved through the sale of Cobham to Advent, despite national security concerns over the private equity takeover of the former London-listed firm, when Andrea Leadsom was business secretary.

Leadsom secured undertakings from Advent that it would not move some sensitive operations out of the UK.

However, this did not prevent Advent from breaking up Cobham by selling its antenna and radio business to America’s TransDigm, and its in-flight air-to-air aircraft refuelling systems to Eaton, another American aerospace company.

Those two deals netted Advent $3.8bn (£2.8bn). Nadine Cobham, whose late husband ran the business after taking over from the founder and renowned British aviator Alan Cobham, said Advent had “dismantled the company and sold off the parts”.

The government already has the ability to intervene in mergers and acquisitions on national security grounds, although the business secretary will gain more extensive powers to intervene under the new National Security and Investment Act from 4 January next year.

A Cobham/Ultra merger before then could be examined under the current regime. Cobham has until 20 August to “put up or shut up” under British takeover rules, although that deadline could also be extended by the UK’s Takeover Panel.

Kwarteng this month said the act would allow the government to “take swift and decisive action against potentially hostile foreign investment”.

The Cobham takeover of Ultra would be likely to be passed by shareholders if it is recommended by the latter’s board. The latest offer is 60% higher than Ultra’s share price before the takeover interest was revealed, and well above its record price of just below £25 per share.

Analysts at Berenberg led by Ross Law wrote that the “significant premium” was “unlikely to be rivalled”, and that UK concern over national security could be overcome.

“We think blocking the deal to a US buyer on national security concerns would set an aggressive precedent at a time when the UK government is looking to strengthen international relations post-Brexit,” Law wrote. “Instead, we expect the government to require strict undertakings to safeguard UK jobs, footprint and technology.”

A Cobham spokesperson repeated a statement from Friday in which it said it had “offered assurances that appropriate national security undertakings will be offered to the UK government”.

A spokesperson for Ultra declined to comment.