Rolls Royce, a favorite position of activist investment firm ValueAct Capital, could see some big changes. There are reports that its submarine business could face nationalization or a merger with BAE Systems, another defense contractor. The reason given for those claims is because the U.K. aims to protect its work on nuclear reactors for submarines, but analysts say this thought is just flat out “ridiculous.”
What is Rolls Royce’s biggest shareholder up to?
Media sources have been reporting that the British government has been scrutinizing Rolls Royce, which has been issuing profit warnings for the last couple of years. U.K. officials reportedly are concerned about the company’s future as it manufacturers nuclear reactors for the British Royal Navy. If Rolls Royce becomes insolvent, officials are concerned that it could jeopardize the development of the next-generation Trident Successor subs, which are capable of carrying nuclear missiles.
Brook Asset Management was up 7.27% for the first quarter, compared to the MSCI GBT TR Net World Index, which returned 3.96%. For March, the fund was up 1.1%. Q1 2021 hedge fund letters, conferences and more In his March letter to investors, which was reviewed by ValueWalk, James Hanbury of Brook said returns during Read More
ValueAct Capital has a 10% stake in the company, which makes the firm its largest shareholder and is said to be demanding a seat on its board of directors. Whenever an activist gets involved with a company, anything could happen, and the U.K. government may be preparing for this. Officials are said to be considering various options to protect the nuclear sub program because Rolls Royce may find itself unable to successfully defend against a hostile bid. One of the options they were reportedly considering was having BAE Systems take over the company’s submarine program.
Analysts decry Rolls Royce reports
Alan Tovey of The Telegraph reports that analysts have dismissed the claims that the British government is looking for options to protect its valuable sub program at Rolls Royce. Because of the firm’s strategic importance as a participant in the U.K.’s nuclear submarine program, no foreign investor is allowed to hold more than 15% of it. Also international ownership is limited to a total of 25%. Further, the British government can keep the company’s nuclear segment from being sold.
Howard Wheeldon, an independent defense analyst, told Tovey that simply to think that nationalizing Rolls Royce is “irresponsible in the extreme” and that no one is even considering it. He also said the company might be considering segmenting some parts of its business but added that Rolls’ strength comes from all of its pieces.
He also called the nationalization suggestions “as ridiculous as they are unnecessary and hugely damaging.” He noted that Rolls Royce has over £70 billion in orders on its books.
Analysts at JEF opined:
We can understand why events at Rolls-Royce may appear disconcerting to many observers, but would reiterate that Rolls-Royce is currently still capable of supporting an R&D spend of over £750m per annum and capital expenditure on property, plant and equipment of around £600m per annum. If Rolls-Royce were to receive a foreign approach, the UK government might justifiably be concerned to protect the nuclear submarine business, but that has been made manifest by retention of an individual foreign shareholding limit of 15% and the Special Share.
That the UK is making contingency plans would seem to indicate that the government is not clear whether the current barricades (there is a golden share preventing takeover, but it is not clear whether this would be enforceable under EU law) would be sufficient to stop a foreign takeover, so it is looking after its own (national security) interests, rather than necessarily seeking to block a takeover of Rolls-Royce per se.
Nationalising RR’s nuclear submarine business. We note this has sales of £500m (out of group sales of £13bn) and no synergies with the rest of RR, other than with RR’s very small business providing controls for civil nuclear power plants. Carving this business out of RR would be quite simple.
in our view.Shares of Rolls Royce declined 2.63% in London today to close at 537.50 pence sterling per share.