ALEX BRUMMER: Prime Minister Boris Johnson has done a reasonable job so far navigating Britain’s choppy waters – but bigger challenges are yet to come
- Current opinion among City’s acquisition advisers is that the coming months could see bigger high-profile deals that will test everyone involved.
- Top target is BT; Another great potential target is all or part of GlaxoSmithKline
- With so much good science, R&D and manufacturing in the UK in GSK, it would be a very difficult deal for the government to make this happen
The deals have come fast and thick in recent months. The tame battle for Wm Morrison is the most striking. After all, every citizen knows and has insight into supermarkets, whether it concerns prices, food quality, empty shelves or speed of delivery.
Most other deals, like Ultra Electronics or Meggitt, have barely caused a ripple outside the financial pages or Whitehall. What makes these engineering and aerospace deals special is their role in our national defense and ownership of valuable R&D. It has been possible for opponents to raise the national security flag.
As someone vehemently opposed to private equity ownership, be it with life insurer LV, Morrisons or Meggitt, one fears the impact of financially driven ownership. In private equity, the broader stakeholder interest hardly exists. These bids, and some lesser-known deals such as those for graphene producer Perpetuus Group, have attracted attention in Whitehall and Westminster. It shows that barriers to takeovers are higher than in the past and that a more determined cohort of executives — too many non-executives are content to fly the white flag — could better defend the goals.
Sailing into the wind: Boris Johnson and Chancellor of the Exchequer Kwasi Kwarteng have done a reasonable job so far sailing Britain’s choppy waters
Another feature is that most of these deals are relatively small, in the few billions. The real test for politicians, investors and corporate boards will come when a bigger FTSE100 beast is targeted.
There is a good track record of larger acquisitions/mergers failing. AstraZeneca drove off Pfizer, Unilever defended itself uncompromisingly against Kraft Heinz and the proposed merger of BAE and Airbus went awry. Only the bid for chipmaker ARM Holdings, sold to Softbank, made it to the finish.
The current view of City’s acquisition advisers is that bigger, high-profile deals could be struck in the coming months that will test everyone involved. The main target is BT. It has two major strategic holders who are in the share register. Aggressive telecom investor Altice, controlled by French billionaire Patrick Drahi, owns a 12.1 percent stake. He would be close to effective control if he could buy the 12 percent stake in Deutsche Telecom. Alternatively, a bidding war could ensue for new chairman Adam Crozier to preside.
As a key strategic asset and a key player in modernizing Britain’s infrastructure, with the rollout of fiber broadband, a bid for the flagship telecom company would pose a real dilemma for the government. It could potentially provide the funding to accelerate fiber to the door, but would mean entrusting the UK’s online future to a foreign buyer.
Another great potential target is all or part of GlaxoSmithKline. The company is going through a difficult transition under CEO Emma Walmsley with activists Elliott shaking the tree. AstraZeneca attracted attention during the pandemic, but it is GSK that is the vaccine champion, with treatments and inoculations for everything from cervical cancer to meningitis and even HIV AIDS.
Soon it will also have Covid vaccines. There is intense speculation that other major pharmaceutical companies, some of them loaded with cash after the pandemic, are eyeing GSK, which is grossly undervalued.
Walmsley is trying to free up value by splitting up its consumer health care division. Perversely, making GSK a purer pharmaceutical and vaccine game could make it much more vulnerable to an overseas and (less likely) UK merger. With so much good science, R&D and manufacturing in the UK in GSK, it would be a very difficult deal for the government to make this happen.
Boris Johnson and Secretary of State Kwasi Kwarteng have done a reasonable job thus far in navigating the turbulent British waters. But the bigger challenges are yet to come.