Rolls-Royce Considers Spinoff -- WSJ
January 18 2018 - 3:02AM
Dow Jones News
By Robert Wall
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (January 18, 2018).
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 pressure from activist
investors.
Rolls-Royce, a major supplier to Boeing Co. and Airbus SE, said
it would focus on commercial aerospace -- which generates most of
its 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 its
commercial-marine business, which has cut staff levels by 30% in
recent years amid slack demand. The division, which sells ship
engines and designs vessels, generated sales of GBP1.1 billion
($1.52 billion) in 2016 but made a GBP27 million loss.
Wednesday's announcement, which as well pointed to other
streamlining steps and possible layoffs, surprised investors, with
the company's stock surging 5.4% to GBP9 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 Boston-based GE to
cut costs and revamp its operations.
Last year, Honeywell International Inc. said it would spin off
its home and transportation businesses, winning over activist
investor Third Point, which 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, which is
expected in May.
Chief Executive Warren East said a need to simplify the
company's structure, rather than pressure from ValueAct, drove the
decision to consider options for the commercial-marine business. He
also said the 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.
Rolls-Royce makes engines to power warships, including Britain's
new aircraft carriers, and that part of its marine division 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 new strategic review marks the highest-profile step that Mr.
East has taken to boost Rolls-Royce's profitability since he took
the helm in 2015 following several profit warnings from the
London-based company. Since then, it has overhauled management and
closed some sites. Also, last week it said it was considering
strategic options for L'Orange, a part of its power-systems
operations.
Mr. East said that 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," he said.
Mr. East has previously promised investors that the company will
generate at least GBP1 billion in cash by 2020.
Rolls-Royce on Wednesday said it plans to further simplify and
restructure the business, with details on job cuts and other steps
to accompany the release of full-year results next month.
"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."
Write to Robert Wall at robert.wall@wsj.com
(END) Dow Jones Newswires
January 18, 2018 02:47 ET (07:47 GMT)
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