Rolls-Royce to Exit Commercial Marine Business in Restructuring -- 2nd Update
January 17 2018 - 10:59AM
Dow Jones News
(Adds context and details from CEO/CFO call.)
By Robert Wall
LONDON--British aircraft engine maker Rolls-Royce Holdings PLC
Wednesday said it may exit its commercial marine business, joining
blue-chip giants such as General Electric Co. and Honeywell
International Inc. that have taken steps to reinvent themselves
under activist investor pressure.
Rolls-Royce, no longer affiliated with the luxury car maker and
best known for supplying engines to Boeing Co. and Airbus SE
jetliners, 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 has launched a strategic review over the future of
its commercial marine business, which has seen a 30% cut in staff
in recent years amid slack demand, Rolls-Royce said. The marine
business, which sells ship engines--including those for
warships--and designs vessels, had 1.1 billion pounds ($1.5
billion) in sales in 2016 but made a GBP27 million loss.
Rolls-Royce announced the move only hours 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 said it would spin off its home and
transportation businesses, winning endorsement from activist
investor Third Point, which had pushed the Morris Plains,
N.J.-based company to streamline.
Rolls-Royce is 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, who called 2018 a breakthrough year, said the
commercial marine business would require future investments, which
Rolls-Royce may not be willing to undertake.
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 marks the
highest-profile step yet that Mr. East has taken to boost
Rolls-Royce's profitability after he took over the company in 2015
following several profit warnings. Since then, the company that
competes for business with General Electric Co. (GE) has made large
layoffs, overhauled management and closed some sites.
"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.
Shares in Rolls-Royce surged 5.93% after the announcement.
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.
--Oliver Griffin contributed to this article.
Write to Robert Wall at robert.wall@wsj.com
(END) Dow Jones Newswires
January 17, 2018 10:44 ET (15:44 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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