Active investment commentary & analysis

A big opportunity for a circular UK economy

Does it matter who owns companies?

A boom in UK takeovers is underway, fuelled by a jump in business confidence and cheap money.

Britain has emerged strongly from the pandemic and is one of the easiest countries to win change of corporate control. Recent months have seen a wide range of sectors impacted – from defence to supermarkets. It is happening too fast to fit in with a new post-lockdown industrial strategy that aims to emphasise sustainability, place and national resilience.

British companies on the stock market have been de-rated following Brexit uncertainty, and the Pound is still below its early 2016 levels.

US private equity has also landed on our shores, with bids for defence group Ultra Electronics and now Morrison Supermarkets. In private hands there is often more flexibility to restructure and borrow – debt has favourable tax treatment. Currently borrowing costs are below the level of inflation, benefiting private equity strategies. While this might improve business performance and help the UK create global champions, some bids appear opportunistic and purely financially-driven, with little public accountability.

More than ever, there is a national determination to develop attractive communities outside the biggest cities. This must involve more emphasis on a circular economy in which thriving communities are supported by a full range of local services.

Given Scotland’s strength in agriculture, it should also involve fewer food miles. Sending Scottish potatoes hundreds of miles south for processing is a round trip that seems out of sync with a sustainable future. It may be hard to stop the advance of technology in some sectors – causing the closure of bank branches for example – but there are many other areas where a change of control should involve much wider consultation, recognising multiple stakeholders and a desire for social and economic change.

Scotland’s plans for communities are progressing this year, with further consultation on how Local Place Plans will work. The National Performance Framework recognises that many different social objectives are linked and the challenges need to be viewed holistically. The approach is commendably flexible, allowing local initiatives, but delivery is very much focused on the public sector and voluntary organisations.

Missing is the ability to shape private sector community services and employment. Certainly, existing legislation on sustainability and stakeholder interests can drive some helpful behaviours. But some of the competitive forces that should encourage innovation and long-term investment might be undermined by mergers and takeovers.

No one wishes enterprise to be stifled by unduly restricting the flexibility of successful businesses to operate. But enterprise and new business formation must be part of the solution for re-generating communities across Scotland. Ill-considered industrial consolidation could easily discourage that. The takeover boom risks creating a headwind for aspiring young businesses. Reduced competition and cost-cutting is the likely result of the current wave of mergers.

The pandemic and new working practice during lockdown have brought a big change in attitudes to home and work. For the first time, there is opportunity to defuse some of the overheating in the biggest cities.

Growing interest in locally sourced services and online delivery has the potential to embed employment in towns and smaller cities. The digital economy allows work to be dispersed and the public sector can support this with thoughtful procurement – giving more consideration to suppliers that support inclusive economic growth. There is a danger that delay in this could see the economy revert to its pre-pandemic structure.

Globalisation has been set back by the pandemic. Instead, supply chains have been shortened in response to Brexit and other trade frictions. The more recent focus on sustainability and resilience has accelerated this move. It would be disappointing if that trend to more local sourcing was reversed internally within the UK. A big opportunity for a circular economy is in danger of being missed.

Policy on takeovers needs to be updated to align with a changed vision of sustainable growth.

A version of this article was published in The Herald on 25.08.2021.