Rolls-Royce’s engines sputter
An activist investor wants the British aerospace group to ditch the unit that produces engines for trains and industry. Matthew Partridge reports
Jonathan Eng, the portfolio manager of RollsRoyce’s large shareholder, Causeway Capital, has fired a “warning shot” across the bow of incoming chair Anita Frew, says Alan Tovey in
The Daily Telegraph. Eng has attacked the board of directors, arguing that it needs “fresh thinking”, and has questioned whether the directors were the “right people that will ask the questions when sticky situations come up”. Most importantly, he is now suggesting that Rolls-Royce’s power-systems unit, which makes engines used in trains and to provide energy for industrial uses, should be sold, so that the company can become a “pure-play aerospace and defence company”.
Eng may think that selling the division, thought to be worth more than £3.5bn, could help RollsRoyce “fix” its balance sheet”, says Alex Lawson in The Mail on Sunday. But management is unlikely to agree a sale of the division without a fight. Strategy director Ben Story claims that there has been a “quiet revolution” in the power-systems business, which has become the “heart and soul” of the group. Not only has the section established joint ventures in China and India, which are “going gangbusters”, but the company as whole is benefiting “from close links between the powersystems arm and teams developing products for electric planes and flying taxis”.
Will the board resist?
Rolls-Royce’s CEO Warren East is likely to “resist” Causeway’s demands, says
Jon Yeomans in The Sunday Times. While Causeway is not agitating for East “to be ejected just yet”, it is not alone in being frustrated that the share price “is now at a third of the level it was when he took charge”.
East insists that this is because the global pandemic has forced him to take “drastic steps to shore up the balance sheet”. But some analysts argue that he waited too long before raising extra cash, causing him to “lose credibility”.
East should stick to his guns, says The Observer.
While offloading the power-systems business to pay down debt may seem an “obvious” move, it “should be resisted”. Diesel generators “are a mucky business that will be on its way out relatively soon”, but other technologies such as fuel cells, hybrid power systems and micro-electricity grids using various fuels “could all play a part in the future of the global economy in ways that are difficult to predict now”.
East may boast about Rolls-Royce’s “push into small scale nuclear and electric and hybrid-electric flight”, with plans to “develop an all-electric passenger aircraft”, but he faces an “uphill battle” to win over investors, says Sylvia Pfeifer in the Financial Times. They would prefer him to focus on “rebuilding credibility in aerospace”. Many industry veterans “remain sceptical that these businesses will generate significant revenue anytime soon”. A crucial test of Rolls-Royce’s ambitions will come next spring when the group “plans to provide financial details about the potential size of these businesses alongside its full-year results”.