Tuesday, April 5, 2022

UK security bill signals open door era for foreign takeovers is over

The new national security and investment bill, aiming to give the government sweeping powers to block foreign takeovers and investments, will inevitably be viewed through the lens of China and new nuclear power plants in UK.

That is, indeed, one way to look at it. Even before the Huawei 5G saga and Beijing’s introduction of draconian security laws in Hong Kong, the mood had cooled on Chinese ownership of critical UK infrastructure.

David Cameron’s government in 2014 promised “progressive entry” into UK nuclear to China General Nuclear, the state-backed firm that owns a 33% stake in Hinkley Point C in Somerset and has ambitions to build its own plant in Bradwell in Essex. That entry ticket will surely have to be cancelled.

But there’s a wider picture. It is the UK’s open-door policy to foreign takeovers, which has been pursued almost religiously over the decades but looks hopelessly out of step with current times.

It is astonishing to recall that, back in 2006, Tony Blair’s government seemed minded to give Gazprom, Russia’s state-controlled energy giant, a green light to buy Centrica, owner of British Gas.

The saga is almost forgotten because a bid never materialised. But, as Centrica’s share price briefly soared, the soft signals from UK ministers at the time were extraordinary. The government’s priority, the FT reported at the time, was to face down “economic patriotism” and let the deal happen.

We’re wiser now, let’s hope. A few City and business lobbyists will grumble that tighter takeover rules threaten inward investment, but the international trend is firmly towards stricter regimes to protect national security.

The process of assessing takeovers still needs to be clear and transparent, and the bill needs to guard against ministers (or the prime minister’s adviser) riding hobby-horses. But a sensible option would be a model based on the US-style Committee on Foreign Investment. The extreme laissez-faire approach has had its day.

Pfizer needs to tread carefully

The other important point about Pfizer’s Covid vaccine – apart, that is, from the highly promising initial results – is the fact that the US drugs giant won’t be giving the thing away for free. It intends to make a profit.

In that regard, the US company is different from the likes of AstraZeneca, which, if its vaccine with Oxford University gets the go-ahead, has promised to distribute doses at cost “during the pandemic”. That pledge is time-limited, note, but is significant.

Pfizer is not running a charity, of course. Indeed, it eschewed financial support from Trump’s “Warp Speed” programme and spent $2bn of its own money on development. As the chief executive, Albert Bourla, put it, he wanted to ensure the vaccine “would not be characterized as the Republican vaccine or the Democratic vaccine. It’s not – it is a vaccine for the world that we are developing.”

Very admirable, but fair pricing is always an issue in pharma-land. That is doubly so when financial analysts are already talking about the annual market for Covid vaccines being worth $10bn-$30bn, a wide range that partly reflects the pricing uncertainty. The picture is further complicated by the fact that BioNTech, the German partner, did accept some public funds to cover development costs.

For the time being, $19.50 a dose for the US market seems to be an accepted price – with prices in western Europe perhaps being lower. In the current clamour for an effective vaccine, that doesn’t seem too controversial.

There could be a problem, though, if rival vaccines don’t arrive soon to provide price-capping competition. Pfizer is suddenly one of the world’s two most popular companies. It also needs to tread carefully.

Rolls-Royce ready to fly

Rolls-Royce’s shares have risen 53% in two days thanks to the vaccine news. Can that really make sense? Quite possibly. Engine flying hours are a critical driver of the company’s revenues since they dictate income from servicing those engines.

Under Rolls’ “base case”, engine flying hours in 2021 were projected at 70% of 2019’s levels, but under a “reasonable worst case” they were put at just 45%. Each percentage point equates to £30m of cash receipts – a lot. So yes, if a vaccine accelerates a return to the skies, that’s critical.

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