Rolls-Royce is poised to seal a £1.5billion sale of its Spanish division within weeks as it desperately tries to bolster its finances. Britain’s flagship engineering giant missed a target to complete the deal on Thursday. But City sources insist that Spanish regulators are preparing to sign off ‘in the next few weeks’.
The agreement to sell ITP Aero, which makes engines for the Eurofighter Typhoon, to US private equity group Bain Capital forms a crucial part of Rolls’ recovery plan after it was battered by the pandemic. The FTSE100 firm needs to sell businesses worth £2billion to shore up its finances.
This is the third shake-up in six years. Measures so far have included cutting 9,000 jobs, taking its workforce to 43,000, and selling off parts of the business.
Prized: Rolls-Royce’s ITP Aero arm makes engines for the Typhoon
The company has raised more than £7billion since the pandemic began, in part from a £2billion share sale two years ago.
But the Spanish deal has been disrupted by state wrangling. Officials in Madrid want to bring local investors on board and are still in discussions with Bain.
The delay comes at an inopportune time for the UK’s leading manufacturing company, which is facing a leadership vacuum. Rolls has been searching for several months for a successor to chief executive Warren East, who announced his intention to quit back in February after seven years.
The board, chaired by Anita Frew, has been interviewing candidates. Frew, 65, is said to be keen to hire an overseas boss, possibly American, to replace East, who has earned £16.6million since joining Rolls.
She wants to have a plan in place by the time the firm – in which the Government holds a ‘golden’ share enabling it to block takeovers – reveals half-year results in August, according to an industry source.
The company’s rules say either the chairman or chief executive must be British. As Frew is Scottish, the new CEO can be foreign. Rolls, which is facing pressure from activist investor Causeway Capital Management, has been urged to look outside the aerospace and defence sectors. It may hire someone with experience in technology or energy.
East leaves at a critical juncture as Rolls tries to recover from the pandemic. At the same time, the company, which is best known for its jet engines, is ploughing investment and talent into new areas. This includes an ambitious Government-backed programme to set up a host of small nuclear reactors.
Rolls has historically earned most of its money from making and servicing large plane engines, an activity that shrank during the pandemic, plunging it into the red.
It also operates in the energy and defence sectors, but has so far failed to benefit materially from a jump in military spending following Russia’s invasion of Ukraine.
Before East joined Rolls, the company had been dogged by scandals and profit warnings. It seemed like he was righting the ship by cutting out layers of bloated middle management and trimming costs.
But when Covid hit he was forced back to the drawing board. Chloe Lemarie, an aerospace analyst at stockbroker Jefferies, said the priority has been to bolster Rolls’ balance sheet after it burned through cash in 2020 and 2021. She said the delays to the ITP Aero sale were out of management’s control and therefore did not reflect on their stewardship of the company.
‘But it does add to the list of things it has committed to and didn’t manage to deliver on time,’ she said. ‘It’s a situation to be monitored.’
Spain wants local groups to own up to 30 per cent of ITP Aero and has been negotiating with Bain for some time on safeguards, such as commitments to protect jobs.
But Rolls and Bain, both of which declined to comment, can complete their part of the deal before the final Spanish shareholdings are arranged.
How rival BAE profited from impact of war in Ukraine
FTSE100 titans BAE Systems and Rolls-Royce are Britain’s most prestigious defence and engineering companies.
But Rolls has failed to benefit from a surge in military spending in the wake of Russia’s invasion of Ukraine – an event that has sent BAE’s shares soaring.
Rolls’ stock is down by almost 30 per cent this year, while BAE’s has rocketed 53 per cent, making it the best performer in the FTSE100 this year.
BAE has repeatedly said that it would be able to capitalise on increased spending on defence in Europe and across the world.
It makes naval ships and fighter jets, helps maintain the UK’s fleet of nuclear submarines, and operates in military training and cybersecurity.
However, Rolls still relies on civilian aerospace for a third of its turnover – and this sector must also thrive for it to deliver a healthy profit.
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