Takeovers and weak pound put spotlight on UK aerospace and defence

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

But in the past three years, several of these suppliers — Cobham, Meggitt and Ultra Electronics — have fallen to bids from overseas suitors. Ultra and Meggitt delisted from the London market in the past two months. In September, another stalwart — privately owned Pearson Engineering, based in Newcastle — was sold to an Israeli company.

The contracting British ownership of a vital industrial sector has renewed debate about its long-term prospects. Companies still recovering from the Covid-19 pandemic face new headwinds of inflation and rising interest rates, while the weakness of the pound has heightened expectations that more groups will fall prey to suitors.

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

“The weak pound, on top of the UK’s attractive engineering skills, means there will be a higher amount of [takeover activity]. I expect there to be more interest from foreign buyers,” he said.

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

He added that there were two big issues driving the rush of takeovers across UK markets: the valuations of similar companies in the US were typically 20-30 per cent higher than those of UK peers and British investors “hate debt”.

“The problem is UK companies can’t buy US ones. They don’t have the firepower to do it . . . And as a rule, UK investors are pretty risk averse.”

Even before the pandemic, Britain’s position as the world’s most important aerospace and defence market after the US had already been weakened by Brexit. Apart from the additional bureaucracy, the UK has been shut out of important pan-EU research programmes.

New figures from industry trade body ADS show Britain’s civil and military aerospace activities generated a turnover of £22.4bn in 2021 — 37 per cent lower than that recorded before the coronavirus crisis.

In contrast, although hit by the pandemic, data from Germany’s trade body show the sector, which for decades trailed the UK, has consolidated its recent lead with revenues of €31.4bn or £27.8bn in 2021.

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

One challenge for British companies, however, was the skills shortage, with some groups struggling to rehire people as the aerospace market recovers, he said.

Craven also cautioned against a “knee jerk reaction” that all takeovers were “a bad thing”, noting that the focus should be on “making sure that key assets are retained in the UK with the right assurances around how the integration [with the acquiring company’s operations] might happen”. 

In the cases of Meggitt and Ultra, the government reviewed both takeovers before ultimately giving the green light after extracting a series of commitments from the respective buyers.

Both America’s Parker Hannifin, which took over Meggitt, and private-equity backed Cobham, which bought Ultra, have promised to protect sensitive technology and beef up spending on research and development.

The takeover of Ultra, which makes submarine-hunting equipment as well as control systems for the fleet of Trident submarines that carry the UK’s nuclear deterrent, caused particular concern over national security.

Meanwhile, Israel’s Rafael Advanced Defense Systems, which took over Pearson Engineering, said the deal would lead to an increase in the number of jobs in Newcastle.

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

Others are worried that critical research and the development of technologies for electric and hydrogen aviation might not take place in the UK if the owners are not committed for the long term.

In aerospace, the government this year committed more funding towards the development of new technologies through the Aerospace Technology Institute, set up in 2014 to allocate state funding for innovation in the sector.

However, some industry executives stress that deeper funding will be needed to realise the UK’s ambitions to be a leader in net zero aviation.

“The UK by virtue of Brexit has not only made itself much less attractive as a manufacturing base due to things like additional paperwork, but it has also got itself out of all of the EU-funded R&D programmes,” said one former small business owner.

Paul Everitt, former ADS chief executive, said the UK was a strong player in the industry, with big global companies, including BAE and Babcock International, and inward investment from leading European groups such as Airbus and Leonardo. But added that Britain does face challenges “further down the supply chain”.

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

In defence, several executives said the government needed to encourage a more focused procurement approach, rewarding companies based in the UK and offering a reliable stream of contracts. This, they said, would help drive innovation and domestic capabilities.

“With the pound so cheap, it makes a lot of the UK companies vulnerable to takeover and the government needs to insist the research and development activities stay in the UK,” said Kevan Jones, a Labour member of the House of Commons defence select committee.