Yesterday the FT published an interesting story about how the UK is concerned with Rolls-Royce. The company has come under pressure with missing its numbers. Today came news that two senior managers are leaving the firm.
Yesterday the FT also mentioned that P&W and Siemens are seen as potential bidders to take over the firm. We had considered the possibility of P&W doing this some while ago.
Even as the UK is rightly concerned with any move on Rolls-Royce, it is also important to note that the UK has a liberal takeover regime. Which is why Rolls-Royce has all sorts of protections, precisely because it is an important national asset as an engineering center of excellence.
What set off the current tension? An activist investor based in San Francisco, ValueAct, caused the first flutter. Ostensibly ValueAct is not a threat to the current management. But even as they may pose no imminent threat, there are a host of stories about the UK nationalizing Rolls-Royce’s nuclear submarine business. A look at a Google search of news on Rolls-Royce looks ominous. A week ago, a leading British investment fund, Equity Income Fund, sold its entire stake in Rolls-Royce. Fund manager, Neil Woodford wrote about his change of heart: “What has changed? Primarily?.?.?.?my long-term confidence in the business model. Rolls-Royce civil aerospace engine business is pretty opaque and difficult to analyse.”
And that is a key item for us, as we consider the news. The selection by Emirates of Rolls-Royce for its next round of A380s engines was odd. The incumbent, Engine Alliance, offered the airline a deal at an unprecedented price. Emirates still selected Rolls-Royce, which leads one to conclude the deal was irresistible. Engine deals are priced over a long term power by the hour arrangements and spares. This is how engine OEMs make their profits. What kind of deal did Rolls-Royce offer? They must have bought the order and it may be frightfully expensive. Neither side is talking. However we understand that two people key to the Emirates deal are former CEO John Rishton and current Aerospace President Tony Wood. Oh, to be a fly on the wall when new CEO Warren East learned the details of the Emirates deal.
Even as Rolls-Royce did that deal, they were working the new A350-1000 engine, while delivering A350XWB engines for the a program that has gone rather slowly in its first year of deliveries. The company won an exclusive A330neo engine deal – meaning more R&D expense before any revenues even as it borrows from existing IP.
These are high profile projects, but volumes are small compared to the single aisle business, where Rolls-Royce has no offering after its sold its stake in the V2500 to P&W. Looking at the sales P&W has accumulated with its GTF, perhaps Rolls-Royce should have increased its involvement rather than sell. Rolls-Royce is now working Liebherr on its gear solution for its Superfan engine – with attendant R&D expenses.
The smart money suggests that Rolls-Royce is vulnerable. The UK government is no doubt pondering next steps. Almost certainly so is P&W; its parent UTC just got $9bn from selling Sikorsky. UTC is looking for ways to gets is share price back up again as the Sikorsky sale didn’t help as it was expected to. Buying a stake in Rolls-Royce would certainly lead to a review by the market of UTC, after all UTC is one of only a few companies that knows how to extract value from Rolls-Royce’s civil aerospace business. Any interest from Siemens only adds to the value of getting a piece of Rolls-Royce cheaply.