Will the UK sell all its crown jewels?

The weaker pound has created foreign interest in British companies. It puts the government on the horns of a dilemma.

A crown jewel.

That’s what Disney boss Bob Iger called Sky when he sided with 20th Century Fox to buy the British media company.

Sky was at the centre of the hottest takeover battle this year.

A Fox/Disney partnership had to take on US cable giant Comcast, which hoped to acquire Sky in order to successfully expand its business into Europe.

In the end the prized possession went to Comcast, which was prepared to shell out more than its rivals.

Now that this tug of war has finally thrown up a winner, a new question might be asked.

How many more of these “crown jewels” does the UK stand to lose?

Last year we’ve seen that a drop in the value of the pound already sparked foreign interest in the UK’s biggest companies.

A “no deal” Brexit would send the pound further down, which could attract even more foreign interest in British companies.

The government is on the horns of a dilemma.

On the one hand it wants to keep the UK open to foreign investment. On the other, it doesn’t like to see its crown jewels falling into foreign hands.

The accomplice

Sky isn’t the first high-profile UK company to attract foreign interest in recent years.

Japanese conglomerate Softbank already paid £24.3bn to acquire UK chip designer ARM Holdings in 2016…

US fashion company Michael Kors took over its UK competitor Jimmy Choo…

US exchange operator CME Group acquired the British NEX Group…

And US food company Kraft Heinz came close to swallowing up Anglo-Dutch rival Unilever.

It’s hard to separate foreign interest in the UK’s “national treasures” from the event that took place on 23 June 2016.

The weakening of the pound following Brexit means UK companies can be snapped up much cheaper than before the referendum.

Of course, nobody buys a company simply because it’s cheap.

But if a foreign company was already interested in acquiring a British firm, then this currency tailwind could get them over the line and encourage them to make a bid.

The weaker pound has suddenly made even the country’s flagship companies more realistic takeover targets.

“Sterling isn’t the villain in post-Brexit M&A,” writes Chris Hughes in Bloomberg, “it’s the accomplice.”

“No one is bidding for a British target solely because sterling is 12 per cent cheaper than just before the Brexit referendum – but the pound’s weakness is only making targets more digestible.”

A new drop in the value of the pound, for example due to a possible no deal Brexit, could lead to another wave of foreign takeover bids.

“Companies which generate a large proportion of their revenue from overseas – and are therefore insulated from economic uncertainty in the UK – will be particularly attractive to foreign bidders.”

If British enterprises will indeed be targeted by foreign competitors, it might not be the best thing to happen to the UK.

The government’s bigger role in monitoring these takeovers is a clear indication that it doesn’t want its crown jewels to be sold without any regard to British interests.

Striking the right balance

Free market advocates will argue that markets can regulate themselves and don’t need government intervention.

And, sure, foreign takeovers have the potential of knowledge and technology spillovers. They don’t necessarily have to be a bad thing.

Still, the government’s walking a tightrope.

The UK’s exit from the EU is supposed to launch “Global Britain”.

The country is going to pursue new trade agreements which it can negotiate independently, painting the picture of an extremely open economy.

The government understandably wants to do everything it can to keep the UK an attractive destination for foreign investment, even if it doesn’t have frictionless access to the EU’s Single Market.

In this sense throwing up barriers to foreign takeovers might be seen as protectionist, the opposite signal the UK wants to send out.

At the same time there are some clear disadvantages from UK companies falling into foreign hands.

Head offices could be moving abroad with key decisions regarding the company’s future taken elsewhere.

A new owner will be looking for cost reductions. Without historical or national ties to production plants, foreign takeovers could negatively impact the UK.

The UK’s relatively relaxed labour laws could work against the country as it’s much cheaper to make people redundant here compared to other European countries.

That may have been less of a concern in the Sky takeover, though in that case US ownership sparked fears the media company might be Americanised.

That’s why the government extracted legally binding commitments from Comcast to keep Sky looking like a British company.

“The solution has been to impose conditions, like keeping divisional offices open in the UK, while stopping short of an actual block,” says Hughes.

“That awkward compromise may prove hard to sustain if the pace of deals picks up.”

The Sky takeover battle proved the government is looking to play a more active role in foreign takeover bids for UK companies.

But if a no deal Brexit causes another big fall in sterling, foreign interest in UK companies could surge.

The government in that case will have to strike the right balance between attracting foreign investment and protecting its “crown jewels”.

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