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Nuclear submarine supplier to be sold to US buyer after diplomatic row

Ultra Electronics provides parts for Britain's Trident-carrying submarines - James Glossop/The Times/PA Wire
Ultra Electronics provides parts for Britain's Trident-carrying submarines - James Glossop/The Times/PA Wire

Kwasi Kwarteng is poised to approve the US takeover of one of Britain's most sensitive defence companies after a transatlantic diplomatic row.

The Business Secretary said that he is prepared to agree to the £2.6bn purchase of Ultra Electronics, which makes vital equipment for nuclear submarines, following promises made by its buyer, Boston-based Advent International.

It comes after US officials threatened to limit defence cooperation with Britain if the deal was blocked.

Advent has offered to place Ultra’s top-secret businesses into two separate legal entities. These will each have a government-appointed director to protect British national security interests and report to the state if the company tries to sell or pare back services important to defence.

As reported by the Telegraph in February, Britain will have powers to seize control of important operations if deemed necessary.

The Business Department said: “The Secretary of State considers that the proposed undertakings would mitigate the national security risks identified to an acceptable level and therefore proposes to accept the undertakings."

Interested parties have until the end of 3 July to offer their views on the arrangement before the UK gives the deal its final approval, but insiders are cautiously confident of success after winning over ministers.

Among other projects, Ultra makes equipment critical for the Royal Navy’s sonar systems.

At least half of the directors of the board of the company will be British, as will its chairman. The deal will last for as long as Advent owns Ultra, which it is purchasing through one of its previous British acquisitions, Cobham, a maker of air-to-air refuelling systems.

The agreement is being touted as much stronger than prior undertakings, such as a “good custodian” pledge Advent made ahead of its Cobham deal, which was a prelude to a string of asset sales.

The move by the Government to indicate a deal is close means Advent has probably avoided a so-called phase two investigation, which would involve a deeper level of scrutiny from the competition watchdog.

Congress recently lifted restrictions on British companies such as BAE Systems and Rolls-Royce.

American sources said in May that Mr Kwarteng's percieved foot-dragging on Ultra was damaging one of the UK's most important relationships.

A senior US Congressional intelligence insider said: “At a time when allies like the US and the UK are looking to deepen defence cooperation, we need to remove obstacles, not create them."

On Thursday Shonnel Malani, chairman of Cobham said: "Today’s announcement is a positive step for investment in Ultra and in the Five Eyes alliance.

"We have always been clear about our unwavering commitment to ensuring that UK's national security is protected and believe these very extensive and robust undertakings will do just that.”

The step towards the sale is the latest move in a saga that began a year ago when Advent made a bid for Ultra after talks over a smaller-scale tie-up between Ultrabetween the two sides collapsed.

Mr Kwarteng ordered the Competition and Markets Authority to investigate the deal last August. It reported back in January and the deal had been largely in limbo since then.

As well as buying up Cobham, Ultra and Typhoon parts maker Meggitt, which is being bought by Parker-Hannifin, American investors have also been quietly snapping up stakes in larger UK defence firms.

This has led to a dramatic shift as US-based investors now own almost twice the share value of UK money managers, Telegraph analysis revealed earlier this month.

A decade ago, shipbuilder Babcock was 58pc owned by British investment houses, but now that figure has slipped to 37pc.  For Rolls-Royce the shift is from 37pc to 7pc and for top defence contractor BAE the move is from 38pc to 26pc.

Meanwhile, US investors have hoovered up the shares, owning 54pc of BAE, 71pc of Rolls and 49pc of Babcock.

The change has sparked concerns over whether investors could demand that less sensitive parts of the businesses be sold off or that the companies should refocus themselves to better reflect their owners.