Bloomberg News

Rolls-Royce Sits Out Industry-M&A Boom With $1.7 Billion Buyback

June 19, 2014

Rolls-Royce Factory

Technicians carry a Trent XWB blisk engine component, the Rolls-Royce engine used to power the Airbus A350, during manufacture at the Rolls-Royce factory in Oberursel, Germany. Photographer: Ralph Orlowski/Bloomberg

Rolls-Royce Holdings Plc (RR/), the second-biggest manufacturer of jetliner engines, signaled that it’s ready to sit out a boom in industrial mergers, opting instead for a 1 billion-pound ($1.7 billion) share buyback.

Rolls shares rose the most in almost two years after Chief Executive Officer John Rishton said the U.K. company will use proceeds from the sale of energy assets to Siemens AG (SIE) to reward shareholders and that “no material acquisitions are planned.”

Rolls-Royce said in January it had failed to buy Waertsilae Oyj, the No. 1 maker of marine engines for tankers, cruise vessels and warships, while Daimler AG in April compelled it to buy full control of a diesel-engine venture at a cost of 2.43 billion euros ($3.3 billion). Analysts said the stock rose today because the CEO ended speculation that $1.3 billion from Siemens could fund a new push for Waertsilae.

“A potential acquisition of Waertsilae has been a major overhang on the Rolls-Royce share price since January,” JP Morgan (JPM:US) Cazenove analyst David Perry said in a note. “This is now removed, at least for the foreseeable future.”

Liberum analyst Ben Bourne said that Rolls would have been able to renew a takeover bid for Helsinki-based Waertsilae post July, adding that the buyback represents a “massive vote of confidence in their cash flow,” especially coming so soon after the transaction with Daimler.

Takeover Spree

Rolls-Royce advanced as much as 7.2 percent, the biggest jump since July 26, 2012, and was trading 5.6 percent higher at 1,067 pence as of 10:41 a.m. in London, where the company is based. That pares the stock’s decline this year to 15 percent, valuing the business at 20 billion pounds.

General Electric Co. (GE:US), the largest maker of jet engines, has slipped 4.1 percent and United Technologies Corp. (UTX:US), parent of Pratt & Whitney, Rolls’s other main rival, is up 3 percent.

The European industrials sector has seen the value of deals triple to $111.5 billion this year, including proposed transactions including competing offers for Alstom SA (ALO) from GE and Siemens, as the economic rebound and cheap financing support deal-making, according to data compiled by Bloomberg.

Rolls-Royce said in February that sales growth will pause in 2014 for the first time in a decade as lower demand for defense equipment offsets healthy civil-aviation sales. The muted outlook was a rare miss for the company, which has rewarded investors with a stock-price gains in 10 of the past 11 years, coupled with steady earnings and dividend payouts.

Future Models

The U.K. engine-maker has focused on long-range airliners, with powerplants on the Airbus Group NV (AIR) A380 superjumbo, Boeing Co. (BA:US)’s latest 787 Dreamliner and exclusivity on the new A350 due to begin commercial flying this year. It has 2,500 Trent-family jet turbines in service and orders for a similar same number.

Still, Rolls faces a challenge on future aircraft, with GE the exclusive provider for the Boeing 777X twin-engine wide-body due around 2020, and Pratt seeking long-haul applications for geared turbofan technology developed for narrow-body planes.

Rolls-Royce said in February that it’s also working on a so-called UltraFan that would be available from 2025 and offer a 10 percent efficiency versus the TrentXWB from the A350. The company is also looking for ways to re-enter the single-aisle jet market, a sector that Rishton said at an investor event today represents a “clear opportunity” for the company.

Deliveries of its Trent engines will exceed 4,000 units by 2023, Rolls-Royce said in a trading update, reiterating its performance targets. The company said it wants to retain a credit rating of between A- and A+.

To contact the reporters on this story: Kari Lundgren in London at klundgren2@bloomberg.net; Andrea Rothman in Toulouse at aerothman@bloomberg.net

To contact the editors responsible for this story: Benedikt Kammel at bkammel@bloomberg.net


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