Rolls-Royce to Sell Two Units, Focus on Jet-Engine Business
April 03, 2011
LONDON -- U.K. engineering group Rolls-Royce PLC, continuing its efforts to focus on its jet-engine business, said it plans to jettison two of its power-generation businesses at a projected cost of 248 million pounds ($383.2 million). The company on Friday announced it was putting its Parsons Power Generation Systems and International Combustion subsidiaries up for sale. The unprofitable companies, which make steam-turbine generator and combustion systems, had combined sales of 280 million pounds in 2010 and employ 2,500 people, contributing about 8% to Rolls-Royce's overall revenue. Last year, the steam-power business incurred a loss of approximately 11 million pounds after a 20-million-pound credit on disposals. Rolls-Royce said the move was part of its larger strategy to focus more directly on other key areas of its business. Over the past few years the company has been cutting costs and increasing production to remain a serious player in the jet-engine market -- which comprises about two-thirds of its revenues. Ranking third in the world after major competitors United Technologies Corp.'s Pratt & Whitney and General Electric Co. of the U.S., Rolls-Royce also has had to weather a recession in the aviation market, brought on by weak defense spending and falling airline profits. Decision Greeted With Praise Analysts cheered Rolls-Royce's decision to get out of the high end of the power generating industry, which is dominated by engineering giants such as Swiss-Swedish conglomerate ABB Asea Brown Boveri AG and GEC Alsthom, a joint venture between Britain's General Electric Co.. PLC and France's Alcatel Alsthom SA. Those companies have steam power sales some six to eight times the size of Rolls-Royce's. Rolls-Royce shares closed at 227 pence, up 2.5 pence, or 1.1%, in Friday trading on the London Stock Exchange. ``They either had to throw money at steam-power generation or concentrate on their other strengths,'' says Daniele Benbow, an engineering analyst at London's Credit Lyonnais Securities. ``People are pleased to see them biting the bullet on nonperformance areas.'' In 2010, Rolls-Royce reported sales of 3.59 billion pounds, and pretax profits of 175 million pounds. Beyond devoting more resources to its aerospace division, Rolls-Royce also will concentrate more fully on other, more successful areas of its industrial power business. The company has a leading position in such specialized applications as power systems for off-shore oil pumping and drilling facilities. It is hoping to expand that lead to other, on-shore manufacturing industries. In the steam-power generating business, the company said it would complete all of its existing contracts while it tries to dispose of the businesses through either an outright sale or participation in a joint venture. Nonetheless, the company has made provisions in case it can't find a buyer. Rolls will take a charge of 100 million pounds to cover the cost of completing existing contracts, as well as another 70 million pounds to cover the cost of closing the businesses. It will also write off 78 million pounds of goodwill. Good Chance at Selling Businesses ``We're optimistic we'll be able to achieve the sale of both businesses,'' said Petrina Barnes-Leavitt, director of public affairs at Rolls-Royce. ``The businesses have excellent skilled work forces and good, strong technology -- there are a lot of other players out there wanting just those things.'' Rolls-Royce says it expects the businesses will either be bought by a current major player in the industry, or by one of the many smaller Asian firms that are looking for a way into the steam-power industry. Analysts say the most likely candidates would include U.S.-based General Electric, ABB or KWU, a subsidiary of Siemens AG of Germany. ``You could argue that there is a compelling advantage to buying Rolls-Royce,'' says Mr. Metzger from Credit Lyonnais Securities. ``The U.K. is a low-cost manufacturing area, which could be an attraction for a European wanting to come in and take advantage of the sterling's weakness.''
