First GE, Now Rolls-Royce: Engine Maker Considers Spinoff -- Update
January 17 2018 - 11:31AM
Dow Jones News
By Robert Wall
LONDON -- British aircraft-engine maker Rolls-Royce Holdings PLC
on Wednesday said it may sell its commercial-marine business,
joining rival industrial giants such as General Electric Co. in
taking steps to reinvent themselves under activist investor
pressure.
Rolls-Royce, a major supplier to Boeing Co. and Airbus SE, said
it would focus on its commercial-aerospace activities -- which
generate most sales and profit -- as well as its defense and
power-systems businesses. The company is no longer affiliated with
the luxury car maker of the same name.
The company has launched a strategic review of the future of its
commercial-marine business, which has cut staff levels by 30% in
recent years amid slack demand. The division, which sells ship
engines -- including for warships -- and designs vessels s vessels,
generated sales of GBP1.1 billion ($1.52 billion) in 2016 but made
a GBP27 million loss.
The announcement surprised investors, with the company's stock
surging 6% in afternoon trading in London.
Rolls-Royce announced the move a day after larger rival GE said
it was considering breaking itself apart. Investors including
activist Trian Fund Management have pressured GE to cut costs and
revamp its operations.
Last year, Honeywell International Inc. said it would spin off
its home and transportation businesses, winning endorsement from
activist investor Third Point that had pushed the Morris Plains,
N.J.-based company to streamline.
Rolls-Royce is also under pressure to improve its financial
performance. Activist investor ValueAct Capital Management LP in
2016 won a seat on the company's board after becoming its largest
shareholder. As part of the deal to gain board representation,
ValueAct agreed not to push for changes in Rolls-Royce's strategy
or publicly challenge management for about two years. That
agreement runs until the next shareholder meeting expected in
May.
Chief Executive Warren East said simplifying the company's
structure rather than pressure from ValueAct drove the decision to
consider options for the commercial-marine business.
Mr. East said the commercial-marine business would require
future investments, which Rolls-Royce may not be willing to
make.
The business review is expected to run into the second half of
the year, Chief Financial Officer Stephen Daintith said. "We are
aware there are those that are interested in our commercial-marine
business," he said, without identifying potential buyers.
The business to power warships, including Britain's new aircraft
carriers, would remain in company hands, Mr. East said. The naval
business, which accounted for about 25% of marine sales, was
profitable, the company said.
The potential disposal of its marine operations mark the
highest-profile step yet that Mr. East has taken to boost
Rolls-Royce's profitability since he took the helm of the company
in 2015 following several profit warnings. Since then, the company
has overhauled management and closed some sites. Mr. East said
after several years of trying to put Rolls-Royce on firmer
financial footing, 2018 could be a breakthrough year.
"Taking this action now will help secure the long-term benefit
for our business and stakeholders of the growing cash flows that
will be generated over the coming years," Mr. East said.
Mr. East has previously promised investors that the company will
generate at least GBP1 billion in cash by 2020.
Rolls-Royce said it was taking measures to further simplify and
restructure the business. It didn't say how many jobs may be shed
as part of the streamlining. More detail on the restructuring,
along with full-year results, will be released next month, the
London-based company said.
"We must address the imbalance and duplication between our
corporate functions and our three business units, as well as the
cost of our corporate head office," Mr. Daintith said. "Costs and
complexity within our business remain too high," he added.
Rolls-Royce last week said it was considering strategic options
for L'Orange, a part of its power-systems operations. Other parts
of the company's power-systems operations are unaffected, it
said.
Write to Robert Wall at robert.wall@wsj.com
(END) Dow Jones Newswires
January 17, 2018 11:16 ET (16:16 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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