10 May 22. It has now been almost eight months since Meggitt shareholders voted to accept an agreed £6.3bn merger of the company with the US engineering and aerospace group Parker-Hannifin and just short of seven months since Business Secretary, Kwasi Kwarteng issued an Intervention Notice under Section 42 of the Enterprise Act 2002 in order to review any possible impact of the takeover on national security grounds.
For a Government that prides itself on saying that ‘Britain is open for business’ it seems to me quite ridiculous that no formal decision allowing an extremely well planned and sensible merger of two corporate entities – one that is not only strategically and culturally compelling but also, as I said at the time of the bid announcement, because the proposed acquisition of Meggitt by Parker-Hannifin has been purposely differentiated in order to relieve concerns observed around other recent US based takeovers – a very important point and one that is entirely unprecedented in that it set out to provide answers to potential questions from regulators and others before these had even been thought or asked.
Again, as I said last September, what set the proposed acquisition of Meggitt by Parker-Hannifin apart from other recent sector deals are the level of binding commitments that have already been made by Parker-Hannifin to the UK Government. I have set these out again toward the end of this piece.
From the outset the agreed Parker-Hannifin bid was built around unlocking of and further developing strengths of both companies in a market that both believe is poised for a return to growth, The planned acquisition of Meggitt by Parker-Hannifin is based on the desire to build on the strengths and legacies of both and enhancing of future prospects and growth creation.
Not surprisingly, the bid opened the door for a range of ill-informed comment from those fearing that the UK was about to lose another important player in the defence and aerospace market. Nothing could be further from the truth and below I set out some of the reasons why in order to dispel some of the myths.
Firstly, in relation to UK defence and where Meggitt is perceived by some to be a major player. In fact, total direct and indirect sales by Meggitt to the UK Ministry of Defence represent less than 2% of Meggitt Group Revenues. The majority of business for the MOD relates around the supply of spares and if that comes as something of a surprise that is because the MOD has been acquiring very little if any UK manufactured military aircraft equipment.
Meggitt does supply equipment for military aircraft that is manufactured in the UK to defence contractors engaged on international export programmes such as Eurofighter Typhoon and the F-35 Joint Strike Fighter programmes.
Importantly, of total FY21 Meggitt Group revenues 61% (£012 million) was derived in the US compared to just 7% (£110m) in the UK. This explains why 60% of Meggitt employees are based in the US against 25% employed in the UK.
Meggitt has long been an international company and today it has 18 sites in the USA compared to just 25% in the UK. The US Government is one of Meggitt’s largest customers and yet here in the UK the company doesn’t even appear on the list of MOD strategic suppliers!
Meggitt’s proposed acquisition by Parker-Hannifin would at a stroke double the size of the existing Meggitt business – a UK headquartered and the combined entity based at the new and highly invested Meggitt HQ complex near Coventry.
Meggitt has a superb forward strategy and one that is significantly enhanced working alongside Parker-Hannifin. This, unlike some other recent announced deals, is not about private equity – it is about common-sense development and progression, the securing of high quality and highly skilled jobs in the UK combined with a commitment from Parker-Hannifin to further investment in innovation, particularly around sustainable aviation.
Clearly, in common with the vast majority of companies engaged in global aerospace, Meggitt financial results have suffered over the past two years as Covid impacted on this vitally important industry sector. For a company that is largely to be considered as an aerospace manufacturing group Meggitt has been forced to reduce its workforce by 25%.
However, the aviation industry is now slowly recovering and the industry is undoubtedly readying itself for new development challenges and opportunities ahead such as sustainable aviation with much greater confidence.
Meggitt and Parker-Hannifin have a complimentary fit in respect of product offerings and this is hugely important for future development and success.
It is also worth noting that Parker-Hannifin has also made a series of important undertakings to the UK Government together with having offered agreeable remedies in order to secure EU antitrust approvals.
To that end, EU Competition Regulators approved the proposed acquisition of Meggitt on the 11th April – this being conditional on full compliance of commitment offered by Parker-Hannifin and that included divestment of Parker’s Aircraft Wheel and Brake division and which subsequent to the approval. Parker-Hannifin has already begun the process of disposing.
So why is it that the UK Government is dragging its feet? Sadly, I am unable to proffer any answer to that question although I will say that I find the continuing delay completely unacceptable particularly given that the Competition and Markets Authority (CMA) review findings on the Parker Hannifin/Meggitt bid had I believe been delivered to Secretary of State, Kwasi Kwarteng, as long ago as the 18 March.
I have no idea what the CMA report has concluded but I sincerely hope that recommendations made in the review of this agreed deal have been based on absolute fact as opposed to some of the myths that I have observed being perpetuated by some during this bid process and that there is now no further unnecessary delay by Business Secretary Kwasi Kwarteng announcing conclusions made by the CMA together with his recommendations.
I note too that whilst the CMA report on the agreed bid for Ultra Electronics by Cobham (the bidding company is now owned by US private equity company Advent) and which is without doubt a far more complex deal than that of Parker-Hannifin’s agreed deal to acquire Meggitt, was actually delivered to the Secretary of State as long ago as the 13 January, although it wasn’t until April 28th – over three months later – that Kwasi Kwarteng announced that there would now be further talks in relation to that particular deal ahead of any possible Phase 2 referral investigation being requested by the Business Secretary.
Given that the CMA clearly acted in a prompt and efficient manner, as have various international regulatory authorities, for a Government which likes to boast that the UK is ‘open for business’ to continue delaying formal clearance of the agreed Parker-Hannifin/Meggitt deal is not only unacceptable and damaging but also in my view, sends the wrong signals out to the UK’s international trading partners. To claim that the ‘UK is open for business’ when delays of this nature occur is nothing short of ridiculous and untrue.
As promised, below is a reminder of the many commitments that have already been made by Parker-Hannifin to the UK Government:
Meggitt will continue to meet contractual obligations in respect of goods and services supplied to or for the benefit of HM Government
Maintain existing technology and UK manufacturing sites for the benefit of HM Government, ensure that Meggitt continues to comply with and enforce security protocols prescribed by HM Government and that will allow for officials to inspect Meggitt’s premises to verify compliance, in each case unless HM Government otherwise consents.
Ensure that the majority of the board of directors of Meggitt will be UK nationals
Maintain Meggitt’s UK headquarters, operate each of Meggitt’s existing divisions under the combined Parker-Meggitt name.
Ensure all four current divisions of Meggitt remain in place.
Maintain Meggitt’s existing R&D, product engineering and direct manufacturing labour headcount in the UK at no less than current levels, while increasing by at least ten per cent. the number of overall apprenticeship opportunities currently offered by Meggitt in the UK.
At least maintain Meggitt’s existing level of R&D expenditure in the UK and, subject to normal levels of aerospace industry growth and activity, increase this by at least 20 per cent over the next five years.
Commit to Meggitt’s targets of reducing net carbon emissions by 50 per cent. by 2025 and achieving net zero greenhouse gas emissions by 2050 across the existing Meggitt business.
The Government needs to get its act together and realise that further delaying a decision following the CMA review is not only costly and damaging to the businesses concerned but also to customers and shareholders. Over to you Mr. Kwarteng!
CHW (London – 10th May 2022)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785
Skype: chwheeldon
@AirSeaRescue