in the back
Selling dummies
Defence , Issue 1513
cobham-falcon.jpg
FLYING OFFSHORE: Despite short-term ‘legally binding commitments’, the long-term future for military tech supplier Cobham and its Falcon 20 (above) remains, er, up in the air
THE first post-Brexit sale of a major British company will be conducted through the European Union’s very own tax haven of Luxembourg – all rubber-stamped by Boris Johnson’s new government.

Just before Christmas, business secretary Andrea Leadsom announced that any national security threats posed by the £5bn acquisition of British military supplier Cobham plc by US private equity manager Advent International group had been sufficiently mitigated. The sale, to a group whose previous UK acquisitions include DFS Furniture, the Priory group and Poundland, could thus go ahead. What arch-Brexiteer Leadsom omitted to mention was the tax-efficient manner in which the deal will work.

While a UK company called AI Convoy Bidco Ltd, controlled by Advent, will actually buy Cobham, this acquiring company is itself owned by a Luxembourg company called AI Convoy (Luxembourg) sarl. Via another Luxembourg company, this in turn is controlled by a Cayman Island group of funds going under the name Advent International GPE IX. The purpose of the arrangement is that when the investors flog Cobham on for a large profit, as is the private equity way, they will avoid tax on the gain thanks to the Grand Duchy’s accommodating tax laws.

Cashing in
If the US private equity group’s track record is anything to go by, it will be cashing in far sooner than is ideal given the long-term horizons of defence projects. The same Advent International GPE IX that is buying Cobham has recently disposed of a string of other companies after owning them typically for three to seven years.

Leadsom sought to offer some reassurance to anybody concerned about the cost-slashing, asset-stripping ways of private equity by adding that a “legally binding commitment” given by Advent’s UK and Luxembourg companies will provide “significant protection of jobs” and “a guaranteed level of [research and development] spend” to “secure the future of Cobham and the important role it plays in our world-leading defence sector and economy”. But, again gliding over the inconvenient small print, she omitted to mention that these commitments are limited to just five years. After that, when whatever’s left of the UK will presumably still need a defence industry, pretty much anything goes for the company that supplies technology in areas such as air-to-air refuelling and electronic warfare systems.

It’s not just Advent’s investors who are feeding at this particular government- sanctioned trough. Among other financial institutions funding a large chunk of the deal are the Blackstone private equity group, Deutsche Bank and Swiss bank Credit Suisse’s Cayman Islands branch. Meanwhile, Cobham is taking some expensive financial advice from JP Morgan, NM Rothschild and Merrill Lynch investment banks.

How expensively consigning one of Britain’s most important defence companies to the offshore, short-termist world of private equity can be reconciled with “taking back control” in a critical industry – especially as Johnson promises to get a grip on defence procurement – is anyone’s guess.

More top stories in the latest issue:

QUESTION MARK…
Mark Shorrock, of Swansea tidal lagoon infamy, is back and peddling shares in yet another lagoon firm. Buyer beware!

CHURCH NEWS
After the last Eye ruffled feathers at Lambeth Palace highlighting the delays in launching a support service for survivors of clerical abuse, five male witnesses accuse a vicar of using ‘naked beatings and ice baths’ in a ‘campaign of fear’.

UNSAFE FOR CHILDREN
Five months after Priory Group promised that improvements had been made after the death of a 14 year old at a psychiatric hospital in Sussex, regulators find it is still unsafe for its young patients.

EXTRA GRAVY TRAIN
Details of how the costs of the UK’s HS2 high-speed rail link are escalating wildly emerge from the pages of an obscure but official European journal.

POST OFFICE PS
Fall-out from the Horizon IT scandal, which saw sub-postmasters sacked or convicted on evidence from faulty IT, may reach all the way to the Cabinet Office.

LEASEHOLD REFORM
Tory plans to boost the housing market by allowing freeholders to stick more storeys on blocks of flats may have blown a hole in much-needed leasehold reforms.

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Next issue on sale: 18th February 2020
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Private Eye Issue 1512