Rolls-Royce to Exit Commercial Marine Business in Restructuring -- 2nd Update

By FeaturesDow Jones Newswires

(Adds context and details from CEO/CFO call.)

LONDON--British aircraft engine maker Rolls-Royce Holdings PLC Wednesday said it may exit its commercial marine business, joining blue-chip giants such as General Electric Co. and Honeywell International Inc. that have taken steps to reinvent themselves under activist investor pressure.

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Rolls-Royce, no longer affiliated with the luxury car maker and best known for supplying engines to Boeing Co. and Airbus SE jetliners, 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 has launched a strategic review over the future of its commercial marine business, which has seen a 30% cut in staff in recent years amid slack demand, Rolls-Royce said. The marine business, which sells ship engines--including those for warships--and designs vessels, had 1.1 billion pounds ($1.5 billion) in sales in 2016 but made a GBP27 million loss.

Rolls-Royce announced the move only hours 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 said it would spin off its home and transportation businesses, winning endorsement from activist investor Third Point, which had pushed the Morris Plains, N.J.-based company to streamline.

Rolls-Royce is 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, who called 2018 a breakthrough year, said the commercial marine business would require future investments, which Rolls-Royce may not be willing to undertake.

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 marks the highest-profile step yet that Mr. East has taken to boost Rolls-Royce's profitability after he took over the company in 2015 following several profit warnings. Since then, the company that competes for business with General Electric Co. (GE) has made large layoffs, overhauled management and closed some sites.

"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.

Shares in Rolls-Royce surged 5.93% after the announcement.

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.

--Oliver Griffin contributed to this article.

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

(END) Dow Jones Newswires

January 17, 2018 10:44 ET (15:44 GMT)

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