TheChek News Flow

Deal likely to add to concerns about the vulnerability of strategic UK companies to takeovers

Cobham, the private equity-owned aerospace and defence group, has agreed to buy rival Ultra Electronics for £2.6bn in the latest takeover of a UK engineering specialist. 

Cobham’s owner, the US private equity group Advent International, has promised to safeguard UK jobs and protect national security in an attempt to allay government concerns about the deal. 

Ultra provides critical technology to the UK government, including submarine-hunting and sonar equipment for the Royal Navy, control systems for the UK’s fleet of Trident nuclear missile submarines and components for F-35 fighter jets.

Under the terms of the deal, Ultra shareholders will receive £35 a share as well as an interim cash dividend of 16.2p due next month, valuing the company at £2.57bn. The price is a 63 per cent premium to Ultra’s closing price on June 24 before the first bid from Cobham, at £28 a share. 

Cobham said it “recognises the specific importance of Ultra’s contribution to the UK’s economy and national security”.

It said it would engage with the government and offer “legally binding and enforceable commitments” on Ultra, including “appropriate protections for sovereign UK capability, continuity of supply and critical capabilities in the UK”. 

It added that it would establish a “forum” with government representatives to enable “ongoing dialogue, co-operation and monitoring” and ensure UK authorities had “full visibility of Cobham’s delivery of the commitments”.

Although agreed by both companies, the deal is likely to add to concerns over the vulnerability of UK defence and engineering companies to takeovers.

Meggitt, another British aerospace and defence specialist, published terms of its £7.1bn takeover by US group Parker Hannifin on Monday. Meggitt is also waiting for details of a possible rival bid from TransDigm, another US aerospace company. The UK Takeover Panel has given TransDigm until September 14 to make a firm offer.

UK business secretary Kwasi Kwarteng is said to be “actively interested” in both the Ultra and the Meggitt takeovers but no decision to intervene has yet been made. A formal national security review into any deal could take some months. 

Under the Enterprise Act 2002, the business secretary can intervene in mergers and takeovers on grounds of national security, financial stability and media plurality. A broader set of national security and investment rules comes into force in January 2022.

Advent’s acquisition of Cobham last year sparked a political outcry. The government eventually agreed the deal could happen with official promises of tight scrutiny. Within 18 months of taking control, Advent had sold more than half the assets it bought by value.

Shonnel Malani, chair of the Cobham group, said the company recognised the “important role that a combined Cobham and Ultra will play in ‘five-eyes’ defence and are committed to protecting the continuity of supply to the UK and our allies”.

Tony Rice, Ultra’s chair, said the company was “comfortable that [Advent’s] stakeholder commitments plus legally binding undertakings” to the government “will protect stakeholder interests”.

US hotel chain aims to capitalise on rush to book luxury holidays after long lockdown

Hyatt, the US hotel group, has agreed to buy private equity-backed resorts operator Apple Leisure Group for $2.7bn, expanding its reach in the fast-recovering recreational travel market.

Apple Leisure, owner of the Zoëtry and Sunscape resort brands, will allow Hyatt to increase vastly its share of the luxury resorts market, which has proved one of the most resilient during the coronavirus pandemic as customers rush to book holidays after long periods of lockdown.

Hyatt said it will fund the acquisition through cash and debt financing. It will also add $2bn worth of assets to an existing programme of hotel real estate sales in order to pay down the debt.

The US hotel group aims to generate 80 per cent of its revenues from management fees, as opposed to owning and leasing hotels, by 2024.

The deal values Apple Leisure, an asset-light operator, at $2.7bn including debt.

Mark Hoplamazian, Hyatt’s chief executive, said on Sunday that “right out of the block”, the deal would double the number of Hyatt resorts around the world, but that Apple Leisure had completed a further 24 deals for new resorts and had 40 under negotiation.

“The fact is that leisure travel is proven to be extremely durable and something that is going to be enduring in terms of demand and I think that the all-inclusive approach is very attractive to a lot of customers,” he said

The deal was the latest move by a big hotel chain to expand its reach into luxury leisure travel, which has bounced back more quickly as international travel restrictions have eased.

InterContinental Hotel Group announced on Tuesday that it planned to launch a luxury resort brand in the next three weeks, while Marriott, the world’s largest hotel group, has also said it wanted to increase its all-inclusive resort offering.

Accor, the largest hotel group in Europe, spun off its high-end leisure assets into a joint venture with the Hoxton hotel chain operator Ennismore last year.

Apple Leisure Group, which is currently owned by the US private equity group KKR and the travel specialist KSL Capital Partners, operates about 100 all-inclusive luxury resorts as well as one of the largest tour operators for package holidays from the US to Mexico and the Caribbean. It also runs Unlimited Vacation Club, a subscription scheme that offers discounts and perks for travellers.

The acquisition will add approximately 28,500 employees to Hyatt, which was forced to lay off a quarter of its head office staff during the pandemic.

Hoplamazian said that the demographic of the Apple Leisure customer was similar to Hyatt’s, whose core strategy is to target wealthier travellers. The deal would “extend and expand the different ways we can care for those travellers”, he added.

The Hyatt boss said that while other competitors had entered the luxury leisure market, “they haven’t expanded significantly yet” and Apple Leisure would give Hyatt “a resource base and an expertise base that will put [the company] in a very strong position to grow that platform more affirmatively and more successfully over time”.

Acquiring Apple Leisure will also allow Hyatt to expand its portfolio of hotels in Europe by 60 per cent.

Chris Harrington and Rich Weissmann, partners at KKR and KSL, respectively, said: “There is simply no better home for ALG to continue on its growth trajectory than being part of Hyatt.”

Apple Leisure’s management team, led by chief executive Alejandro Reynal, will continue to run the company under Hyatt.

Hyatt was advised by BDT & Company, JPMorgan and Latham & Watkins. KKR and KSl were advised by PJT Partners and the law firm Simpson Thacher & Bartlett.

Monthly indicators of industrial, consumption and investment activity all fall short of expectations

BEIJING—China’s economy slowed more than expected in July as extreme weather and the highly contagious Delta variant of the coronavirus swept across the country, adding more strains to a recovery that was already plateauing more than a year after the pandemic first exploded.

Monthly indicators of industrial, consumption and investment activity all showed growth retreating more quickly than expected—and decelerating from June’s yearly growth rates—according to data released Monday by China’s National Bureau of Statistics.

The fresh numbers come after many economists and research firms had already begun lowering their expectations of China’s economic growth, as signs of slowing momentum collide with renewed concerns around the impact of pandemic restrictions.

The data included two key contributors to the headline gross domestic product figure: industrial production, which rose 6.4% from a year earlier, and fixed-asset investment, up 10.3% during the first seven months of the year from the year-ago period. Both rates of increase fell short of expectations, and marked a slowdown from June’s growth rates.

The story was even more disappointing with respect to domestic consumption, another major contributor to the GDP figure and one that was already lagging far behind China’s industrial and export sectors. Retail sales growth slowed to 8.5% in July compared with a year earlier, a pullback from June’s 12.1% increase.

China’s headline jobless rate, the surveyed urban unemployment rate, rose to 5.1% in July, up from 5.0% in June.

“Growth in some consumer sectors and services slowed,” Fu Linghui, a spokesman for the statistics bureau, said Monday, pointing in particular to parts of central China that have been affected by flooding. Mr. Fu warned that growth in the second half of the year was likely to be lower than in the first six months.

In recent weeks, Goldman Sachs, Morgan Stanley and Nomura, among other large investment banks, had reduced their forecast for China’s full-year growth—to around 8.2% or 8.3%, from previous estimates ranging from 8.6% to 8.9%.

Others had signaled that they were ready to follow suit, depending on the July data—a set of numbers that will likely confirm the increasing pessimism about China’s economic outlook.

After Monday’s data release, ANZ cut its full-year GDP target to 8.3%, from 8.8%, citing the “broad-based slowdown in domestic activities in July, which suggests that the economy is rapidly losing steam.”

Economists remain divided on whether Chinese policy makers will step in with support for the economy. Even with the disappointing figures, China is projected to be comfortably on pace to exceed its full-year growth target of 6% or more. In the first half of 2021, China’s economy grew 12.7% compared with the same period a year earlier.

Bill Adams, a senior economist at PNC Financial Services, predicted after the latest data release that Beijing was unlikely to be as aggressive as it was earlier in the year. “Chinese policy makers need to balance the growth outlook against the global uptick in inflation,” said Mr. Adams, who is based in Toledo, Ohio.

One key question is how quickly authorities are able to control the current outbreak of the Delta variant, which has resulted in the shutdown of a major Chinese port and led to broader travel restrictions across the country since it first appeared about a month ago.

In recent days, the official tally of daily symptomatic infection cases has steadily decreased, leading to optimism that the current wave will prove as short-lived as previous waves.

But the impact is likely to still be felt in the retail sector in August, a key month for travel spending. After a string of periodic outbreaks, China’s retail outlets, restaurants and the tourism and transport sectors could ill afford another wave of targeted lockdowns and stricter quarantine rules.

Lucas Liu, an accountant working in Beijing, canceled a planned road trip in August because of the Delta variant. Although municipal officials didn’t restrict anyone from leaving the city, Mr. Liu worried that if he traveled to a city where new infections were found, he could be quarantined there.

“I don’t want to take the risk, although I really want to take my summer vacation,” Mr. Liu said.

Along China’s export-reliant coast, the recent Delta variant outbreaks have made it harder for companies like Senyuan Furniture Group, a high-end custom furniture maker based in the southern province of Guangdong, to service existing customers and scout out new ones.

Wei Wei, who handles overseas clients for the manufacturer of furniture to five-star hotels and other clients in the U.S., Japan, Middle East and Southeast Asia, says the company’s reliance on on-site visits has left it especially hard hit by the prolonged restrictions on international travel.

“It’s hard for us to do business if we can’t visit our customers in person, not to mention attract new clients,” Mr. Wei said.

Another factor weighing on consumer spending may be concerns around Beijing’s broader campaigns against the technology and private education industries, which have led to many workers losing their jobs, said Iris Pang, a Hong Kong-based economist with ING Bank, who before Monday’s data had lowered her forecast for third-quarter GDP to 4.5%, from 5.5% previously.

“Though the number of laid-off workers is not large, sentiment can easily spread to others, who may be more worried about their career prospects and grow more cautious in their spending,” Ms. Pang said.

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Tenfold jump in costs since start of pandemic squeezes importers and exporters

The closure of a terminal at the world’s third-busiest container port is only the latest sign that turmoil in ocean shipping could run into next year, posing a threat to global economic growth as chronic delays and soaring transport costs may leave demand unmet and push up consumer prices.

A coronavirus outbreak led to a partial shutdown at Ningbo-Zhoushan port last week and the resulting suspension of inbound and outbound container ships reduced the port’s capacity by a fifth. It follows another Chinese outbreak in May, which led to a three-week long closure of the Yantian terminal in Shenzhen and created knock-on effects in international shipping.

A relentless surge in shipping prices and persistent bottlenecks at ports around the world have added to the barrage of problems affecting supply chains. These include the semiconductor crunch and the rising price of raw materials, to truck driver shortages as retailers stock up ahead of the peak shopping season.

Importers and exporters are fighting to recoup costs caused by a rise in shipping costs, which have soared to about $15,800 to move a 40-foot container from China to the US west coast — a tenfold jump on pre-pandemic levels and up by half on last month, according to data provider Freightos.

The disruptions started in the second half of last year after demand for goods sank when the pandemic struck and carriers cut sailings, but locked-down consumers then ordered products online at an unprecedented rate.

Shipping companies’ efforts to catch up have been set back by the Suez Canal blockage in March and the Yantian terminal closure, as well as border restrictions and port worker absences.

An indefinite partial shutdown at Ningbo-Zhoushan is the latest problem that could deepen the strain on global logistics. Shipping lines have already started to omit calling at the Chinese port near Shanghai.

About 350 containerships capable of carrying almost 2.4m 20ft boxes are waiting off ports globally, according to VesselsValue. The congestion has been getting worse with idle capacity reaching 4.6 per cent of the global fleet, up from 3.5 per cent last month, data from Clarksons Platou Securities shows.

Lars Mikael Jensen, head of global ocean network at Maersk, the world’s largest container shipping group, agreed that the situation had shown no signs of improvement since the Delta variant of Covid emerged.

“It’s not getting any better on aggregate,” he said, adding that maritime transport networks are “still super stretched — it only takes a small thing then you’re back to square one or square one minus”.

The explosive rise of container shipping rates combined with delays in supplies would have significant consequences, said John Glen, chief economist of the Chartered Institute of Procurement and Supply.

Although he stressed that supplies of most goods were still “sufficient if not bountiful”, there were particular problems for bulky, low-value products, such as foam for furniture suppliers and fairy lights.

“Now is the critical point for supplies into Europe for the Christmas season,” Glen said. Predicted shortages of seasonal goods would drive inflation higher because “there is no short-term solution and the problem is not going away soon”.

German carrier Hapag-Lloyd estimated the disruption would not ease until the first quarter of next year. But chief executive Rolf Habben Jansen also cautioned that that date could get pushed back owing to strong demand.

“There’s record output in some industries, a gigantic amount of stimulus and inventory levels are low,” he said.

Beyond the most affected sectors, such as automotive and textiles, increasing numbers of companies report they are having difficulty in meeting demand and battling pressures to raise prices.

In Europe, these effects can already be seen in weak industrial production over the summer. “Supply chain disruptions are likely to weigh on eurozone industrial production for some time,” said George Buckley, chief UK and euro area economist at Nomura.

The disruptions have prompted larger manufacturers and retailers to consider strengthening their supply chains by holding more stock, double sourcing or even reshoring production. But this comes at a cost and for many small companies it has turned into a matter of survival.

“I think it’s the single biggest threat the economy faces at the moment. It’s only just starting to bite,” said Philip Edge, chief executive of Edge Worldwide Logistics, a Manchester-based freight forwarder. “Imagine if oil went up from $20 per barrel to $200 per barrel, then that would be tantamount to what’s happening now.”

While the comparison is inexact — shipping sets more of its prices on long-term contracts than the oil market does — it illustrates the stresses facing industries that are dependent on long-distance shipping.

James Hookham, secretary-general of the Global Shippers’ Forum, said the pain was particularly acute for businesses in developing countries supplying western markets.

“The thing that kills these companies is the lag between paying higher costs per voyage and the next opportunity they get to renegotiate with their customers, which could be nine or 12 months down the line,” he said.

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