US firm Kraft’s proposed takeover of Cadbury’s has made headlines in recent days. First, because it’s a major, historic British brand being snapped-up by a non-UK business (or ‘foreign predator’, as Vince Cable labels them). Secondly, because of the fear that job losses will result. And, thirdly, because of the role of the Royal Bank of Scotland – in which the British government has a majority stake-holding – in lending the money to Kraft which will fund its acquisition of Cadbury’s.
The Lib Dems – in the shape of Nick Clegg and Vince – have sharply questioned the role of the Government in the takeover. At Prime Minister’s Questions yesterday, Nick asked Gordon Brown:
… there is a simple principle at stake. Tens of thousands of British companies are crying out for that money to protect jobs, and instead RBS wants to lend it to a multinational with a record of cutting jobs. When British taxpayers bailed out the banks, they would never have believed that their money would be used to put British people out of work. Is that not just plain wrong?
Meanwhile Vince has written to the Business Secretary, Lord Mandelson, arguing that:
It seems perverse that a bank still in receipt of large taxpayer support and majority owned by the state should be part funding a takeover of a British company which will likely put jobs at risk and hurt the British economy. We have seen today both Kraft’s and Cadbury’s credit rating lowered to the lowest investment grade on account of the highly leveraged nature of this takeover; so RBS’s decision seems particularly strange. Did RBS at any point discuss its plans with the Treasury and if so did Ministers express a view on its proposed funding of this takeover for the benefit of the UKFI directors on RBS?
The questions are wholly valid. But they beg the question: what would the Liberal Democrats do if we were the government having to make these decisions? The strong implication of Nick’s and Vince’s questions are that the party would have used its position as an RBS shareholder to veto the deal.
In doing so, they would have the strong backing of, among others, TUC general secretary Brendan Barber, who blogged today in praise of Nick’s “very effective” questions to Mr Brown.
The party is of course right to point out Labour’s hypocrisy on the issue – attempting to gain kudos for opposing the deal with words, while at the same time not lifting a finger to stop it with their actions. Labour MPs have been indulging in that kind of cant for years now, supporting Government decisions which mean hospital closures while campaigning against those same closures if they fall within their own constituencies. (Examples: here, here, here, and here).
But we need, I think, to be much clearer about why we think a Liberal Democrat government would intervene to stop RBS lending money to Kraft.
Is it because we think Kraft is an unsuitable ‘foreign predator’, and British jobs might be lost? This is a defensible position: after all, the costs assocuated with those job losses will have to be covered by the taxpayer. In that sense, the government would be looking after its own interests as a shareholder. But the implications for a government intervening in the market on those grounds go well beyond the Kraft/Cadbury deal.
Or would a Lib Dem government intervene because it thinks the deal itself is too highly leveraged, and skewed in favour of hedge funds with short-term interests? Again, it’s a defensible position: after all, the banks have not proved themselves to be experts in picking debtors able to meet their obligations, and it’s the taxpayer who’s picked up the bill. Again, in that sense, the government would be looking after its own interests as a shareholder. But are we really saying that politicians should be the arbiters of whether a takeover deal makes sound financial sense?
These are difficult areas for liberals, as the Prime Minister’s reply to Nick Clegg at PMQs acidly noted:
If the right hon. Gentleman is really suggesting that the Government can step in and avoid any takeover that is taking place in this country overnight, and then tell a bank that it has got to deprive a particular company of money by Government dictate, his liberal principles seem to have gone to the wall.
We cannot in any case be sure that, even if the Government had blocked RBS from lending money to Kraft, the deal would not have gone ahead: non-state-owned banks would have been able to lend Kraft the money without any possibility of government intervention.
Nick and Vince are right to ask the awkward question of Gordon Brown and Peter Mandelson: why is a state-owned bank funding a deal Labour says it opposes? But, equally, we need to be clear what our answer would be in their shoes.
And if the party is saying it would stop RBS from loaning the money, we will need to give precise answers as to why we’d intervene, and ensure we apply these reasons rigorously and consistently across every significant lending decision being taken by the state-owned banks. Sounds like a task for big government.
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11 Comments
As you rightly state, it is a dilemma for a party who would not normally support intervention. Let us hope that the sum to be advanced will be fully repaid with interest and is a sensible commercial operation. Of course, both Nick and Vince were making the point that many UK firms were unable to obtain adequate bank funding. Are we to assume that none of these firms were able to present RBS with an investment opportunity as attractive as Kraft?
Frankly, it depends on whether you’re a left-liberal or a right-liberal. There’s no rule that says liberals also have to be centrists, although the party roughly is, and many of the front benchers are right-leaning.
1) The effect on jobs in this case is unclear. The HQ jobs will go but against that , Cadbury had announced that they would close their Keynsham plant. Kraft say they will keep it open – the Keynsham workers are delighted at the takeover. So it is hard to think that anyone would oppose this deal because of jobs.
2) Banks have never discussed who they will lend money to with their shareholders
3) The idea of politically directly lending is terrible – who knows where that would end?
4) If RBS had not lent the money, someone else would have done. Kraft is not a basket case and would not have found it hard to find a lender
5) If govts prevent foreign takeovers, then people will be less willing to own British shares in the first place, which raises the cost of capital and harms all British firms
6) Who sold the shares to the hedge funds? The fund managers. So if the hedge funds had not existed, the fund managers would have sold directly to Kraft. Hedge funds are not relevant here.
7) Who sold the shares to the fund managers originally? The Cadbury family. If they had wanted to guarantee that it remained British, and true to its roots, they should have kept it private. They chose to sell out, and frankly for them to then complain when the people to whom they sold sell it on, seems to me to be hypocritical.
8) It is an election year. Nick and Vince are allowed to be populist, particularly on issues that do not tie us down long term!
The policy is not not liberal at all, it’s social democratic. Lots of members of the party are social democrats. The long-term strategy at the moment seems to be about making social democratic noises to attract ex-Labour voters like public sector professionals.
Whether it is sensible or not is another matter.
Very pertinent questions Stephen – the party’s position on this (at least in asmuch as it has been articulated so far) is not sufficiently rigorous. It flirts with protectionism in a way that I’m surprised Vince would sign up to – just about stopping short of it by using the pretext of RBS being a state-owned bank. But as you imply, Kraft would likely have been able to borrow the money from elsewhere if necessary, so the ‘taxpayers’ money’ argument looks suspiciously like a cop-out and populist gesture politics.
Intervention begets intervention and, as you say, the logical extension of this is that we need to direct all significant lending decisions by the state-owned banks… Why do I have a feeling this won’t turn out well?
Vince’s position seems to be that the state should use its position as the majority shareholder in RBS to direct lending, block takeovers and ban bonuses. There is some justification for this as a necessary evil in the current circumstances, since no one likes to see what he rightly described as the privatisation of profits and the socialisation of losses.
But Vince seems sanguine about the prospects of this level of intervention carrying on for a decade, having warned against the rapid repayment of the taxpayer and reprivatisation. I would hate to think the ‘never waste a crisis’ mantra is being used to advocate a return to 1970s corporatism through the back door.
Vince has an excellent record of making the (sometimes unpopular) case for free trade, open markets and openness to foreign investment – precisely on the basis that the long-term benefits outweigh any short-term costs. This was, and remains, the right position for liberals.
Tim L is spot-on with his points above, but I’m afraid I’m less indulgent of the party leadership than he is, particularly from a party that righteously claims to be above populism in other areas like civil liberties. It suggests the commitment to economic liberalism is skin-deep.
I think the key point is Tim’s point 4. Even if you think that the government should have tried to stop RBS lending the money……..somebody else would have done so to suggest (or imply) that the government could have stopped it is wrong. Populist perhaps but certainly posturing.
A lot of sense in what Tim says but the Keynsham (Somerdale) point is wrong.
Somerdale workers were not delighted by the prospect of more uncertainty; in fact most are now happy with their generous redundancy terms and not keen to see more uncertainty (just look at Unite’s stance on the deal).
Secondly, Kraft are almost certain to row back on the Somerdale commitment (see for example the recent leak in a national newspaper to that effect).
I’d be flabbergasted if Somerdale reopens
Kraft took over Terry’s of York, and closed it down moving production out of the country. Does any more need to be said as to why a state owned bank should not be involved in supporting Kraft.
Ahem – I guess we will see on Somerdale. The man from Keynsham on the television was pretty pleased!
I understand the Toblerone factory is still in the same place, following Kraft’s takeover years ago. And it tastes just as good (as do Terry’s Choc Oranges)!
Tecnicaly it isn’t usualy illiberal for the government to control what it owns (unless that control should be locally devolved), it fact it might be liberal as it gives public acountability to an institution which no longer has private acountability on the free market. What may be illiberal is if running a bank in the public intrest damages its profitability which would mean keeping it nationalized longer than necessary.
As for other banks lending the money instead, it could be argued that the government (and anything owned by it)should not aid the takover out of principal.
Tim – it’s already been leaked in the papers that Kraft have gone back on their Somerdale pledge (not least because it made no economic sense and was pure posturing at the time they made it). Somerdale will close as planned and staff get to keep their generous pay-offs. That at least remains a win-win.
Terry’s choc oranges aren’t made in York anymore, by the way, and they are just about the only remaining old Terry’s product that still gets any marketing spend; the remainder of the old Terry’s business has been allowed to wither on the vine. Kraft have got a pretty horrible record of making a success of their acquisitions, you just have to look at their tired and low-growth brand porfolio to see that.
That’s the irony – Cadbury is a far more successful, higher growth, better managed business, with much better exposure to emerging markets (eg India and LatAm). The only advantage Kraft had was being twice the size (albeit with a much more highly leveraged balance sheet even before the deal). The only way that Kraft could succeed in its bid, therefore, was by paying a very high price (for which it had to borrow still further, as well as selling off its N American pizza business). That in turn means the pressure to extract “cost savings” will be higher even than usual – and we can expect substantial job losses in the UK over the 12-36mths time horizon (not to mention the loss of many more Cadbury head office jobs more immediately).