23 February 2017
Walking On The Seabed
The withdrawal of the Kraft bid is a stroke of luck for the Government.
By John Watson
I wonder if Mrs May has ever walked across the Red Sea. It has been done before of course to considerable effect, and all that is needed is for the waters to part before you so that you can saunter along the seabed in comfort. Whether it requires divine intervention or just a lucky combination of winds is a moot point but you would not chance it unless you were the sort of person before whom difficulties fall away. Mrs May has now worked the trick twice. The first time she took the Tory leadership across a sea of political corpses who had knifed themselves or each other in a bloodbath worthy of Shakespeare. There was no blood on Mrs May’s knife. She just stood still and the path to greatness opened in front of her. Now it has happened again with the withdrawal of Kraft’s bid for Unilever.
For those who have not followed the saga, the American food giant Kraft Heinz announced a £115billion offer to acquire Unilever. It would have been the biggest takeover ever and the fees to banks and professionals would have been mouthwatering. It would also have posed a challenge to the Government which has yet to spell out its merger policy. Would it, as nice open economies are supposed to do, leave the matter to the shareholders? Or would it block an acquisition which would leave such an important jewel of the economy in foreign ownership? There were complicating factors too. Unilever is a byword for corporate responsibility and the good treatment of its staff. Kraft Heinz on the other hand is part owned by Brazil-based private equity house 3G who would have increased the gearing and looked at new ways of sweating the assets, as private equity houses do. In particular they would have reviewed the workforce, and a workforce which is well treated may also be a work force vulnerable to cuts designed to maximise short term returns. There is nothing improper about that, but Kraft Heinz has a little form in this area having reneged on promises to keep jobs open made during the takeover battle for Cadbury in 2010. That made people worry about how far the process would go.
It all looked rather tricky for a Prime Minister who in her bid for office had indicated a more interventionalist approach and has yet to produce concrete proposals. Would she have to find a tortuous path between Scylla, represented by the standard bearers of the open economy, and Charybdis in the shape of those further to the left? It hardly promised to be a walk in the park, and then… guess what? Everyone fell over and, following a robust rejection from the Unilever Board, Kraft Heinz withdrew their offer, everyone became friends and Mrs May was left to stroll through the Red Sea in peace and to develop her industrial strategy at leisure. Wow! I don’t know where she says her prayers but I think I’ll pop along there too. If she can keep repeating this sort of trick, Brexit should be a doddle.
Still, that doesn’t answer the question of how we should deal with foreign bids for prime British assets, particularly if the prospect of Brexit makes them cheaper than was previously the case. To see how difficult this is you need to contrast reactions to two different pieces of news. The first is that Unilever will not be taken over by Kraft Heinz. Well, I expect most of us are pleased about that. Unilever is a well managed company and an example of British business at its finest. No one likes to see leveraged buyouts of that sort of thing. Leaving aside any damage to the tax base (most of the interest on the acquisition debt arranged by 3G would no doubt have been tax deductible), it was bound to be followed by aggressive cost cutting, loss of jobs, closure of factories, damage to industrial stability. Yes, I’ll drink a glass to the defeat of all that.
Then there is a comment made about Rolls Royce in Shaw Sheet’s ‘Week in Brief’ last week: “….each division is showing promise of growth this year and next, with cost cuts in many key areas, but especially in engine servicing, seen as a major success in improving productivity without reducing quality.”
Whew! I am glad they got the costs down. We need our industries to be fully competitive. Rolls Royce has had a difficult time. No room for complacency. I’ll drink to that one, too.
How then are we to decide when cost cutting is a good thing and when it is bad? Is British ownership the test or would that show a disturbing lack of internationalism? Does it matter that the owners include a private equity fund? They need relatively short term returns to satisfy their investors, of course, but are their demands really different from those of the stock market? Or does the distinction lie in the target itself, with some businesses having a role in protecting high employment which dilutes their purpose of profit generation? The truth is no doubt a complex mix of all these things and others too, and that is why governments have been reluctant to interfere in this area. If Mrs May decides to take a proactive approach she will need to keep the rules wide and decisions will have to be made on a case by case basis. The uncertainty of the ground surely militates against interfering too much. Wide rules sparely applied must be the order of the day. Formulating policy in this area will not be easy and a certain amount of ad hocery is inevitable. For the moment Mrs May will be glad that the issue has been postponed.
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