Rolls-Royce Holdings PLC (TICKER:RR) said it is in talks with Siemens AG (NYSE:SI) over the sale of its commercial energy production assets.
"These talks have not concluded and we will make a further announcement in due course," the London-based company said in a statement. The transaction involves gas turbine and compressor activities in Rolls-Royce's energy unit, which also includes civil nuclear activities.
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A deal would expand Siemens's hold on Europe's energy business and provide Rolls-Royce with funds to make an acquisition of its own or reward investors in a year of no growth.
Talks between Siemens and Rolls-Royce predate the German company's recent interest in acquiring energy assets also from France's Alstom SA, said a person familiar with the talks.
Siemens, which is preparing a bid to rival General Electric Co.'s possible offer for Alstom, didn't discuss the Rolls-Royce transaction at a board meeting Tuesday, according to a another person familiar with the talks. Siemens has planned another board meeting for May 6.
Terms of the potential deal between Rolls-Royce and Siemens, first reported by Bloomberg News, haven't been finalized, one of the people said.
Rolls-Royce generated about 1 billion British pounds ($1.7 billion) in underlying sales from its energy unit, which uses gas turbines derived from its core commercial airplane activities. The company has struggled to lift profitability at the energy unit, which delivered a 2.5% return on sales last year. It was the only segment at Rolls-Royce that failed to deliver a double-digit return.
"Energy has been an unnecessary distraction that's margin dilutive," RBC Capital Markets analyst Robert Stallard said in a note Tuesday. "We wouldn't be surprised to see some future agreement include a provision for Rolls to keep injecting technology into a Siemens-owned business."
The British turbine maker sees a more than $60 billion 20-year market for the type of gas turbines and compressors it is in talks to sell, with another $60 billion in services, it said in its annual report.
Rolls-Royce Chief Executive John Rishton said in February the company was interested in strengthening its medium-speed marine diesel engine portfolio.
Shares in Rolls-Royce have declined 19% this year, while Siemens stock has slumped 5.2% during the same period.