Rolls-Royce Activist ValueAct Said Lured by Air Services

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ValueAct Capital Management, the activist fund that amassed 5.4 percent of Rolls-Royce Holdings Plc, sees substantial profit-growth potential led by aircraft-engine servicing, people familiar with the initial discussions said.

The turbine-maker’s new chief executive officer, Warren East, who took the reins earlier this month, is positioning the company to grow aftermarket revenue through its long-term TotalCare jet engine maintenance contracts. That, coupled with the company’s growing share of wide-body aircraft engines, will hurt its financials through next year, but will accelerate earnings through at least 2022, said one of the people, who asked not to be identified because the information is private.

U.K.-based Rolls Royce has predicted it will have at least 50 percent share in turbines that power wide-body jets in five years, from about 30 percent today. ValueAct is less interested in the marine and power units, and may push for a strategic review of options for non-aerospace divisions, the person said.

ValueAct, typically a behind-the-scenes activist that often favors negotiating a board seat, disclosed Friday a holding that makes it the company’s biggest shareholder. The revelation comes just weeks after East took over as CEO, replacing John Rishton, who stood down following a series of profit revisions.

East is already leading an operational review of Rolls-Royce’s investments, technologies and factories this year before embarking on a wider evaluation in 2016 to assess which markets to pursue. The CEO halted a share buyback to preserve dwindling cash reserves as he seeks to clean up operations.

Reuters, Misys

San Francisco-based ValueAct, which is led by Jeffrey Ubben, has quietly run at least three activist campaigns at London-listed companies -- and each was ultimately sold: financial news and data group Reuters Group Plc, which was acquired by Thomson Corp., financial software developer Misys Ltd., later sold to private equity firm Vista Equity Partners, and Invensys Ltd., the engineering group bought by Schneider Electric SE.

ValueAct manages more than $18 billion and favors good companies with recurring revenues that it views as temporarily mispriced. The activist has influenced the direction of public companies including Microsoft Corp., Gardner Denver Inc., Valeant Pharmaceuticals International Inc. and Sara Lee Corp.

Looking forward

“We have engaged in constructive discussions with ValueAct over recent days and welcome them as an investor who recognizes the long-term value of our business,” Rolls Royce said in an e-mailed statement Monday, adding that East and Chairman Ian Davis were in the talks. “We have frequent communication with all of our shareholders and meet with major investors on a regular basis.”

East has said previously he “broadly agrees” with the company’s existing strategy and has no plans to meet previous investors’ calls to sell off its marine operations.

The activist may urge Rolls Royce to consider building narrow-body aircraft engines -- potentially via a deal with an existing player such as Pratt & Whitney Holdings -- as airline customers balk at General Electric Co.’s dominance in that space, one of the people said.

Rolls-Royce jumped 5.9 percent, the most since June 2014, to 794 pence at the close in London Friday. That pared the stock’s decline to 7.5 percent this year, valuing the company at 14.6 billion pounds ($22.5 billion). The shares tumbled 32 percent in 2014.

Other Rolls Royce investors have publicly aired concerns. New York-based Sequoia Fund Inc. complained in a letter that Rishton’s management was “stubborn and entrenched.” Investec Ltd. said earlier that the manufacturer could raise 6 billion pounds by selling off its non-aerospace assets.

Activist funds generally acquire equity stakes in public companies and seek to pressure management and directors for changes that boost shareholder returns.

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