Britain For Sale

From the newspaper stable that gives by far the most space to classically Tory, paleoconservative doubts about capitalism, consumerism, American hegemony, wars, and so on, Alex Brummer writes:

Just for a moment, imagine being a tourist in search of the full British experience. Where would you start? Well, you might take a sight-seeing trip around London on a red double-decker bus. You’d possibly visit a quintessentially British store, such as Boots the chemist, Selfridges or Harrods, before having a proper English tea at the Savoy, Fortnum & Mason or the Dorchester. You’d almost certainly go home, via a British airport, thinking you’d seen a slice of the real Britain. But, in one sense at least, you’d be totally wrong.

That bus you boarded at Trafalgar Square is run by a German company. Boots fell to the Italians in 2007. Selfridges, Fortnum & Mason and the Savoy are owned by Canadians; Harrods has been bought by a firm based in Qatar; the Dorchester by one based in Brunei. As for our airports, most of them are now run by a Spanish firm.

Maybe a tourist wouldn’t care all that much, even if he knew. But should we? After all, does it make any real difference if a British company has a foreign master? For the past three decades, the UK has had a completely relaxed attitude about selling off its assets to companies based abroad. Indeed, most of the time, the swallowing up of yet another great British institution barely makes a headline. We may be a nation of homeowners, but we’ve lost our taste for ownership of our own economy and public services — from once-great manufacturers such as ICI to most of the companies that deliver our electricity, water and gas.

Even this week, it became clear that the Government is happy to consider letting a Russian firm, the one behind the Chernobyl accident, run some of Britain’s next generation of nuclear power stations. In fact, to date, we’ve sold off more than half our assets to foreign owners. And the pace is escalating. In the face of political indifference, foreign companies acquired £30billion worth of British enterprises in 2009. In 2010, that rose to a value of £54.5 billion.

Foreign corporations also currently control 39 per cent of UK patents. This is far more than the percentage of foreign-owned patents in the U.S. (11.8), Japan (3.7) or even the European Union as a whole (13.7). At this rate, it’s been said, it won’t be long before we’re all working for foreign companies. So how did we become so attractive to overseas predators? The answer is that it happened in stages, starting with the removal of regulations on overseas investment by former Tory Chancellor Geoffrey Howe in 1979.

This was followed in 1986 by what’s known as the ‘Big Bang’, when a raft of restrictive old practices in the City of London were swept aside. Soon, foreign banks flooded into the City, gobbling up venerable British minnows such as SG Warburg, Robert Fleming and Schroders. Then came Tony Blair and Gordon Brown, who were so keen to keep in with big business that they refused to block any deals — even when the Russians eyed up British Gas. Indeed, anyone — like me — who dared question the great British sell-off was instantly labelled a xenophobe, out of touch with the reality of the modern globalised economy.

What tipped the balance towards foreign takeovers in the late Nineties and 2000s were three key factors: the cheap cost of borrowing; liberal takeover rules; and the presence of global investment banks in the City, with ready access to the world’s capital. Throughout the boom years, these banks were allowed to write their own rules. What this meant, in essence, was that a bank which might once have considered it risky to lend ten times its share capital would now lend up to four times that amount. The result? Foreign companies took full advantage of all this cheap and easy credit to snap up increasing numbers of great British brands.

Not only that, but our eccentric tax system actually made it more profitable for overseas owners to buy companies with borrowed money. For example, foreign firms who buy British companies using borrowed money are able to deduct the interest they have to pay on those loans from their tax bills. And this had a direct effect on jobs in the UK. Weighed down with often massive debts, new owners were far less likely to invest in the future of the firm and were instead more likely to close down factories and plants, throwing thousands of Britons out of work.

Some foreign firms even adopted the practice of making a fast buck by buying a company, stripping its assets and then selling for a quick profit. A classic case was that of the once-great department store, Debenhams, bought in 2003 by two U.S.-based private equity firms. Within three years, they’d stripped the firm of investment, loaded it with debt and sold it on at a big profit. By then, Debenhams was in such an enfeebled condition that it has taken years to recover.

Worse still was what happened to the care homes provider Southern Cross, which came crashing down last spring. The company had been pieced together by a hard-headed U.S. equity firm called Blackstone, after it started buying up care homes across the country. Most of its income was guaranteed, as it came from local authorities. But Blackstone wasn’t prepared to be a long-term owner. Soon, it had hived off many of the freeholds of the buildings to another company, which then sold them off.

Then Blackstone made a quick profit by floating Southern Cross on the stock market, collecting £600 million for itself and its wealthy investors. At the time, Blackstone said they believed that the care homes, with their guaranteed source of income, were capable of being self-financing. But the aftermath from the sale of Southern Cross was disastrous. When new landlords started putting up rents, local authorities were unable to meet the extra cost. A lack of investment and poor management combined to bring Southern Cross to the brink last year, placing its 750 homes at serious risk.

Three thousand jobs had to be cut from the workforce, raising questions about the quality of care in the homes. Eventually, some of the landlords dropped their rents, some took over care homes themselves — and some have yet to come to an agreement with the company. Shockingly, as it turned out, this high-stakes financial game had been played at the expense of 31,000 elderly and vulnerable residents. Meanwhile, elsewhere in Britain, one great company after another was being blithely auctioned off — including Jaguar Rover (to India), Asda (to the U.S.), MG Rover (to China), P&O Ports (to Dubai), the British Airports Authority (to Spain), Corus (formerly British Steel, to India), British Energy (to France), and lottery operator Camelot (to Canada).

It didn’t matter whether the buyer was a foreign company or a private-equity fund. If the price was good enough, shareholders and directors took the money and ran. As firms fell like ninepins around them, canny chief executives demanded new clauses in their contracts that guaranteed the equivalent of lottery wins if their firms were taken over. They did this by insisting that their share options — usually paid out only after a number of years — could instantly be converted to cash.

Ah, argued defenders of this system, but surely all these deals also brought much-needed injections of cash into the economy? And yes, of course, they did — in the short term. But no one was thinking any further ahead. No one had bothered to work out that if it was hard enough to collect taxes from a UK-based multinational, it might be even harder to do so from one based in Munich, Lucerne or Washington DC. If that sounds highly theoretical, then consider what happened after Boots the chemist (Alliance Boots) was sold to the Italian pharmacy king Stefano Pessina and private-equity barons KKR in 2007 for £12 billion. Soon after the takeover, Boots — which had been based in Nottingham for 161 years — moved its headquarters to Zug in Switzerland. Why Zug? Well, certainly not for its climate.

Before the takeover, Boots had paid £89 million in British tax in its final year as a quoted company on the London stock market. Now that it pays its tax in Zug, that figure has shrunk to just £9 million.So the financial rewards from all these foreign takeovers rarely swell government coffers for long. Hence, as more and more British companies vanish overseas, it’s the ordinary taxpayer who has to make up the difference — through higher VAT and other taxes. As well as tax revenue, what is even more worrying is that we’re rapidly losing the crucial skills we need to compete with the rest of the world.

The real tragedy is that no one seems to care when a company like ICI, the great chemicals giant, disappears into the jaws of a foreign power — taking with it scientific and industrial expertise built up over many decades. The truth is that the 2008 Dutch takeover of ICI was, arguably, far more significant than the sell-off of Cadbury, which caused deep public unease. Chocolate, it seems, will always stir more sentiment than paint and chemicals.ICI was vulnerable to foreign interest for two reasons: the lack of Government interest in its possible future and the shareholders’ greed for cashing in — to the exclusion of other considerations. So no one gave much thought to what might happen next.

The ICI integration into Holland’s AkzoNobel was far from painless. Within days of the merger, they were jettisoning some of ICI’s assets — such as its adhesives and electronic materials activities, which were sold to a German competitor. Some 29 factories, including several in the UK, were closed, eliminating 3,500 jobs. In early 2009, AkzoNobel revealed massive losses of £970 million, largely as a result of buying ICI. More job losses were projected, and a pay freeze was imposed on most of the company’s employees. In 2011, the group was still struggling.

How ICI itself has fared financially, within AkzoNobel, is now impossible to discern. But the most significant and worrying loss has been that of a guaranteed skills base. For decades, ICI’s reputation — and its profits — was founded on its ability to develop new products. But once ownership moved abroad, all bets as to the future of such research facilities was off. Indeed, if AkzoNobel sells off further parts of the company, the remaining research laboratories in Slough and Newcastle could well move abroad. After all, no foreign company owes any particular allegiance to Britain. This was vividly illustrated when Kraft Foods took over Cadbury in 2009, after promising to keep open the Somerdale factory near Bristol that made Wispa and other chocolate bars.

Despite this pledge just one month after buying the confectioner, Kraft closed the factory — leading to the direct loss of 400 jobs, and the indirect loss of others in the supply chain. In addition, 160 skilled employees at the company’s Uxbridge headquarters were made redundant, and a further 150 posts are due to go at Cadbury’s historic Bournville factory in Birmingham this year. Surprising? Not really. When companies need to cut capacity, they tend to chop operations far from home first.

Yet the Labour government made little effort to block this unpopular takeover. As for the Tories, David Cameron said at the time: ‘We are an open, global economy. We cannot start creating ownership barriers, trade barriers and protectionist barriers.’ As the economy dipped, Kraft lost no time in squeezing as much income as it could out of its new acquisition in order to pay down debt and please its American shareholders. In March 2010, for instance, Cadbury staff were told that pay would be frozen for three years unless they agreed to opt out of the firm’s expensive final-salary pension scheme.

The arrogant American bosses of Kraft felt immune to criticism — even brushing off politicians’ criticism with disdain. For example, when asked to appear before a Commons select committee to explain the company’s failure to honour its promises, Kraft chairman and CEO Irene Rosenfeld refused. ‘Appearing before the panel was not the best use of my personal time,’ she said. Is this the price that all nations have to pay for an increasingly globalised world? Not at all — in fact, Britain is unique in having such a supine attitude to selling off its crown jewels. Other countries adopt what’s come to be known as ‘economic patriotism,’ which involves putting tremendous obstacles in the path of foreign bids.

Take France, for example, which argues that it’s in the national interest to prevent key technologies falling into foreign hands. Key technologies that extend all the way from nuclear power to yoghurt-making. There was uproar when the U.S. drinks giant PepsiCo was poised to bid for the French food firm Danone in 2005. In the end, the then President Jacques Chirac declared that the French yoghurt-maker was considered a ‘strategic’ company, so couldn’t be sold to a foreign firm.

Similarly, Spain has worked hard to hold on to its energy companies — for example, thwarting a bid in 2006 by German energy group E.ON for Endesa. Yet a year later, because of less patriotic values in Britain, a Spanish company was easily able to buy our own Scottish Power. In Japan, selling a company over the heads of management is unthinkable. And while India has bought UK enterprises such as Jaguar Rover, it won’t allow British firms to take full control of its own companies. As for the U.S., the country which portrays itself as a ‘champion’ of free trade won’t permit foreigners to buy U.S. airlines or TV companies. Oil is also jealously guarded: China’s state-owned oil company, for instance, was prevented from purchasing struggling U.S. oil firm Unocal in 2005.

No one is proposing that all foreign takeovers should be blocked. But we could easily put our own measures into place to limit further damage. There’s nothing wrong, for instance, with having a vetting process for foreign deals that would take into account matters of public and national economic interest. Or with making it illegal for foreign companies to break their promises about keeping jobs and research facilities in the UK. Or with forcing them to declare how much of their bid is based on debt. Directors of British companies could be banned from cashing in on a shares bonanza if a deal went through. In other words, a board would be judging a takeover bid on the basis of its merits, not on how rich it would make individual directors.

Why, then, isn’t the Government considering any of this? Why do we cheerfully continue to auction off everything from nuclear power generators (to the French — and now possibly the Russians) to our most popular chocolate brand? The chief reason lies in our continuing love affair with banking and financial services, which still provide a large slice of our tax revenues. From the late Eighties onwards, governments have viewed these banks — which arrange and finance all these overseas deals — as a sort of universal economic panacea.

At all costs, it seems, the banks need to be kept happy. And since much of their money comes from buying and selling companies to the rest of the world, the British sell-off seems destined to continue unabated. The banks know their power, too. American Bob Diamond, who took over Barclays in 2011, let it be known that he’d consider moving the bank’s highly profitable investment banking arm from Britain to New York if it became, as he saw it, over-regulated or over-taxed. And he’s by no means the only banker making veiled threats behind the scenes.

As matters stand, trying to protect UK companies is like attempting to guard chickens in a coop to which foxes have been invited. In the real world, away from the gilded environs of the City, the tragedy is that tens of thousands of jobs have gone. Crucial skills have been lost — probably for good. And the strategic heart of British manufacturing has been ripped out, which affects our ability to climb out of recession.

Still, the outlook isn’t all bleak: bankers and foreign shareholders are doing just fine.

Extracted from Britain For Sale: British Companies In Foreign Hands by Alex Brummer, to be published by Random House Business Books on April 26, £12.99.© 2012 Alex Brummer. To order a copy for £10.99 (incl p&p) call 0843 382 0000.

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