Rolls-Royce May Need ‘Tough’ Activist for Change, Fund Says

Rolls-Royce Holdings Plc has come under attack from shareholder Sequoia Fund Inc., accusing the U.K. manufacturer of destroying shareholder value by branching out from its jet-engine business, which may require a “tough-minded activist” investor to push through a change.

Rolls-Royce has expanded marine-engine and power-generation business, even as those operations face increasing competition from low-cost Asian producers, Sequoia’s managers, Robert Goldfarb and David Poppe, wrote in the fund’s annual report. In large jet engines, the company enjoys a de-facto duopoly with General Electric Co., with no new rival in sight.

“Rolls-Royce has a world-class business making engines for wide-body jets,” they said. The company “seems willing to destroy shareholder value in the name of diversification. Management and the board seem stubborn and entrenched.”

The letter is a plea for a shake-up, including the possible ouster of Chief Executive Officer John Rishton, said John Hempton, chief investment officer of Bronte Capital, an Australian hedge fund that owns shares in Rolls-Royce.

“He has a little explaining to do or the activists will get rid of him kind of fast,” Hempton wrote in a blog post today in which he highlighted Sequoia’s Feb. 12 letter.

Job Cuts

While Rolls-Royce said the company doesn’t comment on individual analysts or investors, it defended its set-up, saying “there is an industrial, commercial and strategic logic to having both an aerospace business and a land and sea business,” as laid out in the annual report.

New York-based Sequoia, which has $7.8 billion of assets, owns 0.67 percent of Rolls-Royce, making the London-based company is biggest U.K. holding. The fund is managed by Ruane, Cunniff & Goldfarb Inc.

Rolls-Royce, the world’s second-biggest aero-engine maker, announced plans last year to eliminate about 2,600 jobs and named a new finance chief as it grappled with its first sales drop in a decade. Rolls-Royce forecast last month that profit may fall again this year as a slowing economy prompts clients to delay orders and sanctions over the Ukraine crisis stall Russian deals.

The Sequoia report follows a similar attack by analysts at Investec Ltd. last year, which suggested that Rolls could raise its valuation by about a fifth if it split the aerospace business from the land and sea assets as two listed companies. Another option would be to sell non-aerospace assets, which could result in a cash return of about 6 billion pounds ($9.4 billion), or 330 pence a share, they said.

The U.K. company is suffering in spite of high delivery rates of the world’s two biggest aircraft manufacturers, Boeing Co. and Airbus Group NV. Rishton has been reshaping Rolls-Royce’s operations, including the sale of its gas turbines and compressor business to Siemens AG, since taking charge in 2011.

Rolls-Royce dropped as much as 9 pence, or 0.9 percent, to 960.5 pence in London, and traded at 962.5 pence at noon. The stock has gained 11 percent this year, after sliding 32 percent last year, ending a streak of five consecutive annual advances.

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