First GE, Now Rolls-Royce: Engine Maker Considers Spinoff -- Update

By FeaturesDow Jones Newswires

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 activist investor pressure.

Rolls-Royce, a major supplier to Boeing Co. and Airbus SE, said it would focus on its commercial-aerospace activities -- which generate most 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.

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The company has launched a strategic review of the future of its commercial-marine business, which has cut staff levels by 30% in recent years amid slack demand. The division, which sells ship engines -- including for warships -- and designs vessels s vessels, generated sales of GBP1.1 billion ($1.52 billion) in 2016 but made a GBP27 million loss.

The announcement surprised investors, with the company's stock surging 6% in afternoon trading 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 GE to cut costs and revamp its operations.

Last year, Honeywell International Inc. said it would spin off its home and transportation businesses, winning endorsement from activist investor Third Point that 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 expected in May.

Chief Executive Warren East said simplifying the company's structure rather than pressure from ValueAct drove the decision to consider options for the commercial-marine business.

Mr. East said the commercial-marine 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.

The business to power warships, including Britain's new aircraft carriers, 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 potential disposal of its marine operations mark the highest-profile step yet that Mr. East has taken to boost Rolls-Royce's profitability since he took the helm of the company in 2015 following several profit warnings. Since then, the company has overhauled management and closed some sites. Mr. East said 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," Mr. East said.

Mr. East has previously promised investors that the company will generate at least GBP1 billion in cash by 2020.

Rolls-Royce said it was taking measures to further simplify and restructure the business. It didn't say how many jobs may be shed as part of the streamlining. More detail on the restructuring, along with full-year results, will be released next month, the London-based company said.

"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," he added.

Rolls-Royce last week said it was considering strategic options for L'Orange, a part of its power-systems operations. Other parts of the company's power-systems operations are unaffected, it said.

Write to Robert Wall at robert.wall@wsj.com

(END) Dow Jones Newswires

January 17, 2018 11:16 ET (16:16 GMT)

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