FTI Consulting International Trade Bulletin – 19th August

FTI’s Key Headlines

American Investors Target UK Defence Industry

This week’s developments in Afghanistan have come at an interesting time for the UK’s defence sector. British defence firms have received considerable attention from American private equity, attracted by strong revenues and the comparative strength of the dollar over the pound. Last year, the Dorset-based Cobham Group, whose refuelling technology is flown by the RAF, was eventually bought by US private equity firm Advent for £4bn after much Government angst. While undertakings were enforced, this did not stop Advent from divesting of much of the company’s assets, including Cobham Mission Systems, the air-to-air refuelling business, to Eaton Corporation, and its antennas and radios operation which was sold to TransDigm. It is this apparent lack of control that makes some politicians anxious.

On Monday, Ultra Electronics, another critical supplier to the Ministry of Defence, announced a potential £2.6bn takeover, by none less than the now US-owned Cobham Group. The deal will be subject to a CMA review on national security grounds, but seems likely to proceed. Elsewhere, TransDigm and Parker-Hannifin are currently engaged in a dogfight over Coventry-based aerospace firm Meggitt,  a supplier of parts to the Typhoon jet and Apache helicopter. TransDigm has been given four weeks by the UK Takeover Panel to “put up or shut up” in its efforts to break up the planned agreed takeover by its rival Parker-Hannifin, who bid 800p-a-share in a takeover agreement with Meggitt’s board.

These cases will be a key test for the recently introduced National Security and Investment Act, which gives the government greater powers to investigate and intervene in mergers, acquisitions and other deals that could threaten the UK’s national security. Many smaller investors are currently staying clear of the battle over Ultra as they wait to see if the NSI Act has teeth and whether the government will use its new powers. Ultimately the decision on whether to intervene will remain in the hands of ministers who face a difficult balancing act between the need to secure continued foreign investment in UK plc with national security concerns over the independence of the domestic defence sector.

“Perfect Storm” for Global Shipping

The UK’s supply chain disruptions continue, with industry figures warning that there could be a shortage of toys in the shop in the run run-up to Christmas due to a “perfect storm” of economic pressures disrupting supply chains. Whilst some have been swift to blame Brexit and subsequent red tape, the situation is more nuanced with the continuing covid disruption being primarily driven by covid, resulting in container shortages and rising shipping costs.

A recent Covid has continued to cause havoc with global supply chains, with an outbreak resultting in a partial shutdown at the world’s third-busiest container port, Ningbo-Zhoushan, for a sixth straight day on Monday, threatening around £124.13 billion in global trade. The pandemic has instigated a huge rise in shipping costs, with the price of moving a container from China to the US west coast up tenfold from pre-pandemic levels. Covid not only forced ships to be redirected from their intended direction, resulting in containers piling up in the wrong location but also resulted in a slump in the production of containers themselves. The efforts of the global shipping industry to increase operations earlier this year were further hampered by the blockage of the Suez Canal in March.

The view across the Channel is not much better with the chip shortage continuing to cause disruptions in the continent’s manufacturing industry. Volvo Car AB are is among the continent’s businesses that are affected with the company suspending operations at its plant in Ghent for three days next week and Infineon Technologies, Germany’s biggest semiconductor company, has warned that the global chip shortage “may stretch into 2023.” It is not just European companies that have been affected by the chip crunch hitting multinational giants including Tesla, Apple and Microsoft.

These major supply disruptions are unlikely to improve anytime soon with some predicting the global disruption will continue unit at least the first quarter of next year. Considering the lack of a domestic coal mining sector it may seem that British children will not even be getting a lump of coal in their stockings this Christmas.

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