Nationalising Rolls-Royce’s nuclear submarine business, which powers the UK’s Trident deterrent, is one option under consideration by the government should the crisis at Britain’s premier engineering group deepen.
David Cameron’s office has had plans drawn up to protect UK interests as Rolls-Royce seeks to recover from five profit warnings in less than two years. Other scenarios include a merger of all or part of Rolls-Royce with BAE Systems, the UK’s biggest defence group.
The inquiry comes as nervousness grows over whether Rolls-Royce could face a foreign bid before its new chief executive, Warren East, is able to stabilise trading and restore investor confidence. Officials are concerned that Rolls-Royce’s management has no substantial experience of defending against hostile takeovers, according to sources familiar with the plans.
The state has protection against a potential hostile bid through a golden share, which bars Rolls-Royce from selling 25 per cent or more of its net assets or of the nuclear division without its consent. There is also a ceiling of 15 per cent on foreign ownership. These safeguards were built in when Rolls-Royce was privatised in 1987, having been rescued through nationalisation 16 years earlier.
However, a new owner could present an opportunity to improve the company’s performance, and benefit shareholders, Ministry of Defence analysts say.
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In this scenario, investors could put pressure on the government to waive its veto at least for the group’s civil aerospace business, which is the world’s second-largest maker of aero-engines. Pratt & Whitney of the US and Siemens of Germany are considered potential bidders.
Philip Dunne, defence procurement minister, did not confirm the existence of the emergency plan for Rolls in an interview with the Financial Times last week. However he said the UK government was “concerned that Rolls-Royce performs and is capable of performing its nuclear obligations. We would definitely take a view in the event there was corporate activity,” he said.
Rolls-Royce is not just a critical supplier to UK defence through its design and servicing of nuclear reactors that power the Royal Navy submarines, it is also the biggest single employer in Britain’s aerospace sector, and a major exporter.
The 109-year-old company has been left reeling by a series of profit warnings rooted in poor performances in its defence operations, its marine engines, and latterly a slowdown in the lucrative aftersales service business on civil aero-engines.
The company refused to comment on the government’s emergency plan. A government spokesperson also refused to comment on the scenarios, though she added: “Rolls-Royce is a major contributor to the UK economy and is an important supplier of defence equipment to the government.”
The MoD in October prepared an extensive document for the government’s shareholder executive, and passed this to the Cabinet Office, setting out a range of options in the event of a bid.
However it was then asked to give more consideration to a possible nationalisation of the sensitive nuclear division, which is estimated to generate roughly £500m in annual revenue from military business.
These questions include what legislation would be required for a partial or total nationalisation, the regulatory issues, and the necessary consultation with the US, supplier of Trident ballistic missiles to the UK.
According to the 1958 mutual defence treaty with the US, any change to the operation of the factory making the nuclear reactor cores would require the agreement of US authorities.
Among other options that could be considered, the MoD suggests bringing in sovereign wealth funds to give Mr East time to implement his recovery strategy. However this is judged unlikely.
Though a merger with BAE is mooted, the MoD’s analysts question whether there could be resistance from the companies involved. Such a deal would also have the potentially undesirable effect of increasing the government’s reliance on BAE as a defence supplier. The MoD accounts for roughly 9 per cent of Rolls-Royce’s turnover.
Other options include the government acquiring a stake in Rolls-Royce. This latter option would be costly and a stake of more than 25 per cent would be required to have any impact on strategy.