Industry trade

Takeovers and pound weakness spotlight UK aerospace and defense

Britain’s aerospace and defense sector has been a rare bright spot, defying the trend of a shrinking manufacturing base in the country for more than 30 years, with a hard core of heavyweights such as BAE Systems and Rolls- Royce surrounded by a group of key suppliers.

But over the past three years, several of those suppliers — Cobham, Meggitt and Ultra Electronics — have fallen at auction from foreign suitors. Ultra and Meggitt have been delisted from the London market in the past two months. In September, another stalwart – the private Newcastle-based Pearson Engineering – was sold to an Israeli company.

The shrinking British ownership of a vital industrial sector has reignited debate over its long-term prospects. Companies still recovering from the Covid-19 pandemic face further headwinds of inflation and rising interest rates, while the weakness of the pound has bolstered expectations that more groups will become the prey to suitors.

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

“Weakness in the pound, in addition to the UK’s attractive engineering skills, means there will be a greater amount of [takeover activity]. I expect there will be more interest from overseas buyers,” he said.

A Meggitt employee repairs a bottle used for extinguishing fires on airplanes. The company was acquired by the American company Parker Hannifin in September 2022

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

He added that there were two big issues driving the rush for takeovers in UK markets: Valuations of similar companies in the US were typically 20-30% higher than their UK counterparts and British investors “hate debt”.

“The problem is that British companies cannot buy American ones. They don’t have the firepower to do it. . . And in general, UK investors are pretty risk averse.

Even before the pandemic, Britain’s position as the world’s aerospace and defense market after the United States had already been weakened by Brexit. Apart from the additional bureaucracy, the UK has been excluded from important pan-European research programmes.

New figures from trade body ADS show that Britain’s civil and military aerospace business generated revenue of £22.4bn in 2021, 37% less than that recorded before the coronavirus crisis.

By contrast, although impacted by the pandemic, data from the German trade body shows the sector, which for decades followed the UK, consolidated its recent lead with revenues of £31.4 billion. euros or £27.8 billion in 2021.

Craven said the UK figures still reflected the impact of Covid-19 and stressed there was no evidence yet of “structural change or a decrease in the UK’s competitiveness”.

A challenge for UK businesses, however, was skills shortages, with some groups struggling to rehire people as the aerospace market recovers, he said.

You see a snapshot of an interactive chart. This is probably because you are offline or JavaScript is disabled in your browser.

Craven also warned against a ‘gut reaction’ that all takeovers were ‘a bad thing’, noting that the focus should be on ‘making sure key assets are kept in the UK with the right assurances on how the integration [with the acquiring company’s operations] could happen”.

In the cases of Meggitt and Ultra, the government vetted both takeovers before finally giving the go-ahead after extracting a series of commitments from the respective buyers.

American Parker Hannifin, which took over Meggitt, and private equity-backed Cobham, which bought Ultra, promised to protect sensitive technologies and increase research and development spending.

The takeover of Ultra, which makes submarine hunting equipment as well as control systems for the fleet of Trident submarines that carry Britain’s nuclear deterrent, has raised particular national security concerns.

Meanwhile, Israel’s Rafael Advanced Defense Systems, which took over Pearson Engineering, said the deal would lead to more jobs at Newcastle.

Still, some industry experts question whether the rush for takeovers could lead to a hollowing out of the sector’s tightly integrated supply chains.

Others fear that critical research and development of technologies for electric and hydrogen aviation will not take place in the UK unless owners make a long-term commitment.

In aerospace, the government has committed more funds this year to the development of new technologies through the Institute of Aerospace Technology, created in 2014 to allocate public funds to innovation in the sector.

However, some industry leaders point out that more funding will be needed to deliver on the UK’s ambitions to be a leader in net zero aviation.

“The UK, due to Brexit, has not only made itself much less attractive as a manufacturing base due to things like the extra paperwork, but it has also withdrawn from all UK-funded R&D programs. EU,” said a former small business owner. .

Paul Everitt, former chief executive of ADS, said the UK was an important player in the sector, with major global companies including BAE and Babcock International, and overseas investment from major European groups such as Airbus and Leonardo. . But added that Britain faces challenges “further down the supply chain”.

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

In defence, several leaders said the government needed to encourage a more targeted procurement approach, rewarding UK-based companies and providing a reliable flow of contracts. This, they said, would help spur national innovation and capacity.

“With the pound so cheap, it makes many UK businesses vulnerable to a takeover and the government must insist that research and development activities remain in the UK,” said Kevan Jones, Labor member of the select committee. defense of the House of Commons. .