ALEX BRUMMER: Powerplay at Rolls-Royce takes off

ALEX BRUMMER: Powerplay at Rolls-Royce takes flight after a change in the composition of the share register


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Amid the existential crisis facing British Prime Minister Rolls-Royce during the pandemic, changes to the composition of the share register drew little attention.

As investors from the large British battalion withdrew, US funds saw an opportunity for growth. From small beginnings, Causeway Capital Management has built up a stake of nearly 9 percent. Another American fund, Capital, built up a hefty share of almost 8 percent.

Blackrock and Vanguard also became significant investors. As welcome as US support has been, it’s not a piece of cake. Outgoing chairman Sir Ian Davis experienced turbulent times with Causeway Capital last year when the investor was asked to post his share of the £2bn rights issue.

Amid the existential crisis facing British Prime Minister Rolls-Royce during the pandemic, changes to the stock register's composition drew little attention

Amid the existential crisis facing British Prime Minister Rolls-Royce during the pandemic, changes to the stock register’s composition drew little attention

This in turn unlocked around £5bn in funding, including a £2bn government-backed loan from the Export Credits Guarantee division. With Davis on his way to exit, Causeway portfolio manager Jonathan Eng, who ultimately backed Rolls in his hour of need, wants successor Anita Frew, who will take up the position of chairman in October, to reshape the board.

Rolls-Royce post-pandemic is a very different business from before Covid when civil aviation and revenue from the Trent engine dominated. Currently, there are three more or less equal revenue streams from civil aircraft, defense and energy systems.

There are also prospects for strong future revenues from small modular reactors and engines for electrified aircraft. When trying to get a different palette of drivers on the board, Causeway may be on to something. At the time of the financial crisis, we saw how ill-equipped some bank executives were to restrain executives and understand the complexities of the subprime securities being recorded on the balance sheet.

Tom McKillop may have done a good job leading pharma group Astrazeneca, but was ill-equipped to tame Fred Goodwin. A lack of expertise, a tendency to ‘groupthink’ and a lack of commitment to R&D, the environment and the wider public interest has become apparent this year as UK engineering and food supply are targeted by financially driven, asset-striping buyers.

Rolls-Royce post-pandemic is a very different business than before Covid when civil aviation and revenue from the Trent engine dominated

Rolls-Royce post-pandemic is a very different business than before Covid when civil aviation and revenue from the Trent engine dominated

Rolls-Royce post-pandemic is a very different business than before Covid when civil aviation and revenue from the Trent engine dominated

As one of the few companies with a golden ‘government’ share, there is no risk of that at Rolls-Royce. But the plea for broadening the director’s base to focus on future-proofing seems sensible. Power Systems, best known for making diesel engines and valued at £3.5 billion, is seen by US investors as a potential sales target.

In many ways it is at the heart of the new Rolls-Royce, with its intensive work on reduced carbon-emitting systems and fuel cells. The investment community is so focused on aerospace that the division’s potential future value has been overlooked by a board heavy with aerospace expertise.

Causeway may have had his disagreements with Rolls, but he doesn’t act like the bully on the playground like the infamous activist Elliott Advisors. In trying to revive governance, the US investor is on to something.

Loan rangers

One of the legacies of Andrew Bailey’s stewardship at the Financial Conduct Authority (FCA) was the regulatory crackdown on payday and doorstep loans. Wonga is a vanquished mobile app. Guarantee loan specialist Amigo is having trouble breathing. And now the grandfather of lending at the door, socialite John van Kuffeler, is putting away his abacus.

It has only been two years since Van Kuffeler, 72, besieged his previous employer Provident Financial through the listed Non Standard Finance (NSF). He was divested after regulators intervened.

Since then, NSF’s value has fallen to just £11 million, or 3.6 pence per share. Now it needs survival funds of up to £40million to rehabilitate injured customers and get back on the doorstep. Provident is recovering after putting her lending arm into insolvency, capping compensation. It focuses on a credit card for the less fortunate.

The worst practices of authorized loans for the poor may be cured, but as the Bible stated, “the poor will always be with you.” A consequence of ending sanctioned usury is that loans are transferred to people with baseball bats and county line operators who provide cash loans in exchange for drug distribution. That can’t be what the FCA wanted.

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