The British engineering group, Rolls-Royce, announced a £576 million sterling (€898 million) bid for defence firm Vickers yesterday in a move to create a marine engines giant bearing the renowned RR brand.
Rolls-Royce launched a friendly, all-cash bid of 250p per share for its fellow British company, which has a range of interests from tanks and turbines to marine propulsion systems.
The price, the equivalent of $933 million, represented a hefty premium to Vickers' market valuation, and stock in the company duly soared by almost 50 per cent to 245p per share.
Rolls-Royce defended its generous bid by stressing that the alliance with Vickers would place it well ahead in the growth market of powering ships, and would boost profits within a year of the takeover going ahead.
Formed in 1906, Rolls-Royce has already reinvented itself once from a manufacturer of prestigious cars into a fully-fledged aerospace and engineering group with clients in 135 countries. The deal announced yesterday cements its diversification into the marine power and energy generation sectors, the company said.
In July of last year, Vickers sold Rolls-Royce Motor Cars to Volkswagen of Germany for £479 million. "The acquisition has powerful industrial and financial logic," said Rolls-Royce chairman Sir Ralph Robins. "The combination of the two marine businesses will provide a wide range of competitive products, services and brands."
Investors were not so sure, driving down Rolls-Royce stock 3.25p to 222.75p in a buoyant overall market.
Analysts were also wary of the deal, saying that it represented extremely good value for Vickers, but did not address the main problem facing Rolls-Royce of how to boost its struggling aero-engines business.
"Rolls-Royce has bought a very nice marine-propulsion business at a good price, but marine is only a minor part of Rolls' business," said one sector analyst. "Their main operation, aero-engines, will still have margin problems."
Analysts also wondered what Rolls-Royce would do with Vickers' defence operations, particularly given a dearth of new orders for the Vickers Challenger II tanks.
"Rolls needs to offload the tanks business, but it will prove difficult to find a buyer considering the state of Vickers' defence order book," said another sector analyst with a major European bank. Sir Ralph noted that the Vickers defence division would account for just six per cent of the enlarged group, and added that he would look at how to "rationalise this division and take advantage of the ongoing consolidation in this market".
Vickers has itself has been trying without success to offload the division, mindful that its contract to supply Challenger tanks to the British army is due to expire early in 2001.
Sir Ralph ruled out large-scale job losses from among Rolls-Royce's 40,000 staff as a result of the deal, stressing that the takeover "is not about achieving cost savings".
"We will be looking hard at how we can. . .boost our share of the marine after-market, where margins are traditionally higher than for civil aviation spares," he told AFX News.
Rolls-Royce signalled its intentions in the marine power business last month when it unveiled its biggest ever order for ship engines - a billion-dollar contract to supply 25 engines for US company FastShip's high-speed transatlantic freight vessels.
