No breakup at Rolls despite activist investor on board, says chairman

Ice Crack Split

The chairman of Rolls-Royce has insisted the engineering group will not be broken up despite appointing the chief operating officer of ValueAct, the activist US investor, to its board.

Rolls has named Bradley Singer as a non-executive director and a member of its science and technology committee, giving him a front row seat from which to see the company’s latest innovations.

The California-based fund had been lobbying Rolls behind the scenes for a seat on the board and there were fears that it could push the company into breaking itself up.

ValueAct revealed seven months ago that it was building a shareholding in Rolls and it now owns 10.8%, making it the biggest shareholder.

However, Ian Davis insisted Rolls would not split off its largest businesses. Asked whether ValueAct was pushing for a breakup, he said: “They have not and we will not break the company up.”

Rolls has issued five profit warnings in the last two years and cut its dividend for the first time in 24 years.

The company has five divisions – civil aerospace, defence aerospace, marine, nuclear, and power systems. The civil aerospace business, which makes engines for the Airbus A380 and the Boeing 787 Dreamliner, is widely considered to be the most lucrative part of Rolls.

The company has struggled due to defence spending cuts by western governments, a fall in demand for corporate jets, and customers in the energy industry cutting investment.

Sir John Rose, who led Rolls from 1996 to 2011, led the diversification of the company into sectors outside its core aerospace business, such as marine. However, this led to Rolls pulling out of the market for single-aisle aircraft, which critics claim is at the heart of the company’s problems given the booming market for short-haul aircraft.

Although Davis ruled out a breakup of Rolls, he admitted the company could make smaller asset sales.

Warren East, who took over as chief executive of Rolls last summer, is trying to turn the company around by cutting up to £200m of costs a year, which he hopes will make the engineer more nimble.

Singer insisted he was “deeply impressed” by the senior team at Rolls and their “commitment to improving their operations to match the company’s world-class product portfolio and engineering capabilities”.

He added: “It is a privilege to be joining the board and I look forward to working closely with the board members and management team as they execute their plans for sustained long-term success.”

The agreement between Rolls and ValueAct means the investor will lose its seat on the board if it takes its shareholding above 12.5% or below 7.5%. ValueAct will also be blocked from calling shareholder meetings, proposing a merger or takeover of Rolls, proposing changes to strategy or management, and publicly criticising the company. ValueAct must also vote in favour of resolutions proposed by the board at Rolls’ annual meetings.

The terms of the deal, revealed in a document published by Rolls alongside the announcement about Singer’s appointment, will last until its annual shareholder meeting in 2018, although they could be extended.

The Rolls chairman said that Singer had an “outstanding record” as a business leader and had been appointed after a rigorous selection process. “He has a deep understanding of institutional investors in the US, which is very important to Rolls,” he added.

However, Davis admitted that ValueAct’s shareholding in Rolls had been the “catalyst” for the appointment.

Shareholders will vote on the appointment at Rolls’ annual meeting in May. Davis said he expected investors to back the appointment, after canvassing their views. “The vast majority are neutral or positive,” he said.

Davis said he had spoken to the UK government about the appointment. The government has a “golden share” in Rolls due to its involvement in key defence projects, such as the UK’s collection of nuclear submarines.

“The UK government is a shareholder and I have talked to all shareholders on this,” he said.

The appointment of Rolls comes after East sent a memo to staff last year describing activist investors as mostly “capitalists seeking the opportunity of a business in some kind of transition”.

However, Davis said the phrase “activist investor” was “emotive” and actually represented a “broad” collection of groups, with ValueAct at one end of the spectrum and focused on long-term investments.

ValueAct has pressed for changes at 75 companies since Jeffrey Ubben launched the firm in 2000. It helped to engineer the departure of Steve Ballmer as chief executive of Microsoft.

The fund seeks to distinguish itself from aggressive US activists such as Carl Icahn and Bill Ackman, who use public campaigns to pressurise boards into doing their bidding. ValueAct portrays itself as a low-key, long-term investor working more like a private equity firm to improve a company’s performance over many years.

Before joining ValueAct, Singer was the chief financial officer of Discovery Communications and American Tower Corp. He also worked as a investment banker at Goldman Sachs in London and New York.

Powered by Guardian.co.ukThis article was written by Graham Ruddick, for theguardian.com on Wednesday 2nd March 2016 15.08 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

JefferiesAnd the Best Place to Work in the global financial markets 2017 is...

Register for Financial Markets News Alerts