Rolls-Royce Considers Sale of Commercial Marine Unit

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Posted January 25, 2018

Rolls-Royce will consider selling its lossmaking commercial marine business as chief executive Warren East launches a new round of cost-cutting in a bid to accelerate his shake-up of the blue-chip engineer.

Mr. East said he was looking at the strategic options for the marine business as part of a wider restructuring that includes consolidating Rolls-Royce’s five business units into three.

In a sign of frustration over the slow pace of change at the 111-year-old company renowned for its hierarchical procedures, Mr. East said there was a need to “reinforce behavioural change with further measures to streamline processes”, which are expected to focus on management and support functions.

Mr. East said the review of its civil marine unit and the streamlining of its business units into civil aerospace, defence and power systems would “assist us in improving performance from our core businesses”. The company will give details of cost savings when it announces its annual results on March 7. Rolls-Royce said it remains comfortable with market expectations for 2017 profits.

Although a sale of the commercial marine business is likely, according to a person with knowledge of the situation, Rolls-Royce will keep its naval marine business, which will be absorbed in an enlarged defence division.

As well as closing its marine division, Rolls-Royce is winding up its nuclear division by moving the submarine propulsion business into the defence unit and the civil nuclear unit — a contender in the UK government competition to build small modular reactors — into the group’s power systems business.

Mr. East promised shareholders last year that after years of cost-cutting and restructuring he would review the group’s strategic direction. He said he wanted 2018 to be “a breakthrough year” in terms of the restructuring he launched on his arrival in 2015, and in respect of the group’s cash flow generation. Rolls-Royce has in the past said it expected cash flow to improve from this year and Mr. East restated his goal of finding efficiency improvements amounting to £1bn by 2020.

A decision to exit commercial marine, which supplies engines and other equipment for the offshore oil and gas industry and merchant ships, would please many investors who have pushed for the group to shed a business that has suffered badly as a result of the downturn in oil and gas exploration. The company’s share price jumped more than 5 per cent to close at 900p on Wednesday after the Financial Times reported the review of the business.

£28m – Losses at Rolls-Royce marine unit, comprising commercial and naval, for 2016

15 Remaining factories in Rolls-Royce marine business, down from 27 three years ago

In 2016, the marine division, combining commercial and naval, reported losses of £27m on sales of £1.1bn. The commercial marine element accounted for 75 per cent of revenues.

Mr. East has repeatedly voiced his support for the diversified portfolio built up by his predecessors. He had postponed a decision on a possible disposal of marine while the business — based in Norway and Finland — was being restructured.

Close to 2,000 jobs have been cut in the marine business in the past three years, and the number of factories reduced from 27 to 15.

In an interview with the Financial Times last month, the division’s chief executive, Mikael Makinen, suggested there could be further factory closures if the market continued to be depressed.

Rolls-Royce has attempted to reduce its reliance on the oil and gas market by investing heavily in autonomous and remote systems, as well as real-time monitoring using big data to improve efficiency of fleets. Mr. East told shareholders last year that the opportunities in this area were such that he planned to increase investment in research and development.

Announcing the changes on Wednesday, Mr. East said: “We have carved out an industry-leading position in ship intelligence and autonomous shipping and it is only right that we consider whether its future may be better served under new ownership.”

The company has hired Lazard, the investment bank, to advise on the review of the commercial marine business. A decision on whether to sell all or part of the division is expected by around the middle of the year. The review of commercial marine’s future within the group will come as a surprise to Rolls-Royce’s marine employees, many of whom believed Mr. East would resist pressure to divest the division. “Rolls-Royce has repeatedly over the past few years confirmed their commitment to the marine industry?.?.?.?and I do not see any reason to doubt that commitment,” one union leader told the FT last month.

Earlier this week, Rolls-Royce confirmed it was considering a sale of L’Orange, a Germany-based subsidiary that makes fuel injection systems for marine and industrial diesel engines. The statement followed a report by Bloomberg last week that suggested a sale could raise as much as $700m.

Source: Financial Times