Part of the debate – in the House of Commons at 4:22 pm on 23rd May 1995.

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Photo of Mr Michael Heseltine Mr Michael Heseltine President of the Board of Trade 4:22 pm, 23rd May 1995

I would like to make a statement about the proposed acquisition of VSEL.

I released to the House and to the stock exchange this morning my decisions on regulatory approval for the proposed acquisition of VSEL by either British Aerospace or GEC. I shall now make a statement on the basis for my decisions in the two cases.

Because both bids satisfied the turnover criteria of the European Community merger regulation, the question of regulatory approval would normally have been a matter exclusively for the European Commission, but VSEL's facilities for the construction of nuclear submarines and other warships are plainly vital for United Kingdom national security. Accordingly, the Government took action, through the use of article 223 of the EC treaty, to assert UK jurisdiction over the two merger proposals in so far as they related to the military activities of VSEL. That was the first occasion on which the United Kingdom had invoked the procedure. In practice, the civil component of VSEL's activities is very small, but at the end of last year the EC Commission gave its approval for the acquisition of the non-military component by either British Aerospace or GEC.

The United Kingdom reserved for itself a judgment on how the Royal Navy's requirements for submarine and warship procurement would be affected by a prospective change in the ownership of VSEL. I referred both bids to the Monopolies and Mergers Commission because, given the nature of the target company, I felt it right to have a comprehensive analysis of the UK public interest in both cases, and because I was conscious of potential competition concerns in relation to the GEC bid.

I am grateful to the MMC for the thorough exercise that it has undertaken. Complex issues are involved, as is shown by the fact that the MMC Group did not reach a unanimous view on the GEC bid. But the reports have provided me with a sound basis of analysis from which I can proceed to make the decisions that fall to me under the Fair Trading Act 1973.

The MMC identified no adverse effects for the UK public interest in relation to an acquisition by British Aerospace. The British Aerospace bid is thus cleared to proceed.

The MMC was unable to agree its view in relation to the GEC bid. The majority, consisting of four out of six members, found that there would be adverse effects resulting from a GEC acquisition. Their view was that those effects would arise from a reduction in competition at both prime contractor and subcontractor levels with consequent risks to innovation and to the Ministry of Defence's ability to achieve the best value for money. The recommendation from the majority was, therefore, that the GEC bid should be blocked.

The minority view taken by the remaining two of the MMC Group was that, because of the Ministry of Defence's skills as a monopsony buyer, the GEC acquisition would make no significant difference to the degree of competition in the industries involved in warship making and would contribute to the ease of an ultimately necessary industrial rationalisation.

The advice from the Ministry of Defence to the MMC took the same view as the minority report. As the United Kingdom had claimed jurisdiction over those mergers in the light of our defence interests, I also had to give particular weight to the views of the Ministry of Defence as the customer. As will be seen from the report, the Ministry of Defence judged that the imminent bidding process for Trafalgar class submarines and type 23 frigates would be largely unaffected by a GEC acquisition. It was also confident that it had the resources and means to extract the best value for money, whoever acquired VSEL.

In the light of those considerations, I have decided to allow the GEC bid for VSEL to proceed. I take no view on whether British Aerospace or GEC should prevail. I note the assurance given to the Ministry of Defence by Lord Weinstock that, if GEC wins the competition for the next type 23 frigates, those vessels will in any event be built at Yarrow. The Government will of course be ready to use their well-established arrangements to support British Aerospace or GEC, whichever acquires VSEL, in seeking additional exports of warships to buttress declining domestic demand.

I recognise that it is unusual to set aside an adverse finding by the MMC on a prospective merger. But it is my responsibility under the Fair Trading Act to look at the UK public interest in the round, having regard to all relevant factors, including, in this case, the United Kingdom's defence interests. I have concluded that the public interest will be best served by allowing the market to determine the future ownership of VSEL and hence the industrial structure best adapted to meet the UK's foreseeable naval defence needs.