Rolls-Royce has taken a big step forward in repairing its battered balance sheet after agreeing to sell its Spanish aircraft engine manufacturing business to a private equity-led consortium for €1.7 billion.
Shares in the FTSE 100 group rose 9 per cent to 144.24p by mid-afternoon on Monday after it announced a deal to sell its ITP Aero unit to a consortium led by Bain Capital, as well as a significant contract win to upgrade engines on US B-52 bomber aircraft.
Rolls-Royce, which is paid according to the hours flown by aircraft that are fitted with its engines, took a big financial hit from the grounding of flights during the coronavirus pandemic. It promised investors last year that it would raise £2 billion from disposals this year.
The sale of ITP Aero has brought the company close to that target and will do much to boost investor confidence that the group is finally on a recovery path. Rolls-Royce has in recent months sold a number of smaller assets, including a stake in the company that owns the RAF’s fleet of refuelling planes, its Norwegian maritime engine unit Bergen, and a civil nuclear instrumentation and control business.
The aero-engine group swung back into profit in the first half of this year, although it warned at the time that it would miss a target to deliver £750 million in free cash flow next year owing to the uncertain pace of recovery in international travel.
Rolls-Royce's biggest investor, Causeway Capital Management, recently called on incoming chair Anita Frew to refresh the board as it emerges from the crisis and seeks to navigate the decarbonisation challenge.
The announcement was a “significant milestone for our disposal programme as we work to strengthen our balance sheet, in support of our medium-term ambition to return to an investment-grade credit profile”, said Rolls-Royce’s chief executive Warren East on Monday.
Rolls-Royce will receive total cash proceeds of about €1.7 billion, while the proposed sale values ITP at an enterprise value, which includes debt, of about €1.8 billion.
The deal is still subject to certain conditions, including regulatory clearances, but is expected to close in the first half of next year.
Bain's consortium includes Spanish co-investors Sapa Group, which specialises in technologies for heavy vehicles in the defence industry, and JB Capital, with potential for further industrial partners to join the group.
As part of the agreement Bain has offered a series of commitments to the Spanish and Basque governments, including to maintain workforce levels.
The private equity group said it would also maintain ITP’s “decision-making centre, industrial capacity, technological capacity and registered office and tax domicile in the Basque Country, as well as its industrial and R&D activity”.
Rolls-Royce said ITP Aero would remain an important strategic supplier.
Separately, Rolls-Royce said it had reached a deal to supply F130 engines for the US air force’s B-52 fleet for the next 30 years. The contract could be worth up to $2.6 billion. – Copyright The Financial Times Limited 2021