Open for Business? The case for the defence…

22 Feb 2022

The Government’s 2021 Defence and Security Industrial Strategy looks to position the defence sector in the middle of the UK’s post-Brexit shop window. However, many in the Government are wondering if, when it comes to defence, they are opening the shop door a little too wide…

In this blog, DRD Associate, James Browne, takes a closer look at what current Government thinking might mean for the UK defence sector.

Britain has always been good at making dangerous things, or things which watch dangerous things, or things which make other things less dangerous. The clout of its world-leading defence sector far outstrips its military reach these days.

So, it’s little surprise that the Government’s 2021 Defence and Security Industrial Strategy (DSIS) keenly looks to position the defence sector in the middle of its post-Brexit shop window:

“…for Global Britain to succeed we need to make more of these great strengths. So with our partners across government we have a vision to unlock the potential of the defence and security industries.”

The DSIS also commits to “prioritise UK industrial capability” and “help retain critical industries for our national security and future.” However, many in the government are wondering if, when it comes to defence, the Government is opening the shop door a little too wide. And nothing is likely to get Tory moustaches bristling as much as jeopardising national security. Playing fast and loose with the defence of the realm? Indefensible…

Changing the rules of engagement

The UK’s Enterprise Act 2002 “allows the government to intervene in mergers and acquisitions on public interest grounds.” But since January, any interventions relating to national security will now come under the auspices of the new National Security & Investment Act (NS&I), which leaves investing in 17 designated sectors in the UK subject to direct political control if there are perceived national security concerns.

When, in 2019, US Private Equity group Advent bought the venerable UK defence manufacturer Cobham (which pioneered air-to-air refuelling technology), stern defence types sent grave warnings about the wisdom of allowing the deal.

The Government, after “meticulous thought”, waved it through, satisfied that it had “mitigated the national security risks identified to an acceptable level” with the remedies it requested. Advent itself trumpeted a “legally binding commitment that there will be significant protection of jobs.”

Within 18 months, Advent had disposed of the majority of UK manufacturing capability. This led many to caution that the government’s ‘Global Britain’ policy has created an overly laissez-faire approach when it comes to protecting defence assets. The hostile takeover by Melrose of one of the UK’s largest defence engineering companies, GKN, sanctioned by the Government in 2018, is seen as another case in point.

“…for Global Britain to succeed we need to make more of these great strengths. So with our partners across government we have a vision to unlock the potential of the defence and security industries.”

HM Government, Defence and Security Industrial Strategy (DSIS)

An orderly retreat?

But there are signs that the mood is changing. Kwasi Kwarteng, the Business Secretary, is currently looking at two other major defence deals: US PE group Parker Hannifin has recently agreed a takeover of Meggitt, a flagship UK defence firm, while Cobham (now controlled by Advent) has moved to take over Ultra Electronics, whose tech is widely used in the nuclear submarine fleet.

Against an increasingly fraught geopolitical backdrop, the Business Secretary, formerly a proud free marketeer, has the unenviable task of trying to balance these considerations. The rigid official line on the deals is that Britain remains “open for business,” but there is an increasing sense that the Government has been getting it wrong more often than it has got it right.

Difficult terrain

He is being keenly watched. Despite these deals falling under the remit of the Enterprise Act, the government’s actions here could set a precedent for how widely it intends to wield its new powers under the NS&I Act. In a recent DRD survey of dealmakers, 70% believed the NS&I Act would make it harder to do deals in the UK.

Nonetheless, language has been hardening in recent days and caveats are creeping in:

“While the Government welcomes foreign investment, it is right that we fully consider the national security implications of this transaction.”

While an outright block on the deals seems doubtful, it looks increasingly likely that the Government will be demanding much stricter remedies this time round. As former defence chiefs thunder that “the Government seems to have walked away from having an industrial strategy,” it may wish to avoid the optics of another Cobham.