Yahoo Finance Rolls-Royce needs jets in the air – and government on its side for the long haul
Defence industry executives and analysts are starting to grow weary of interventions from across the Atlantic. Meggitt, Ultra Electronics and Senior have all been subject to various degrees of bid interest. Last week another front opened, as a large US investor signalled its belief that Rolls-Royce, the most blue-blooded of British industrial champions, is in need of “fresh thinking” on its board.
Officials are already “monitoring” the takeover bids, but the comments on Rolls-Royce from California-based investor Causeway Capital Management suggest the government should show that it has a long-term plan for UK industry.
Jonathan Eng, a portfolio manager at Causeway, told the Financial Times that Rolls-Royce needs more expertise on decarbonisation. He also said it should explore selling the power systems business, which has mainly built large diesel engines for yachts and trains.
Causeway has been a shareholder in Rolls-Royce since at least 2018, but it first hit the 5% hurdle for mandatory public notification in May last year, when Rolls-Royce shares were still gripped by lockdown panic. Since then it has built up a 9% stake, which puts it ahead of another five US investors at the top of the share register.
The pandemic has made Rolls-Royce vulnerable to pushy shareholders. Its jet engines business wilted as planes were grounded and its pay-by-the-hour maintenance revenues disappeared, forcing it to raise more than £7bn in equity and debt (including from the government).
After raising the emergency cash, Rolls-Royce has tried to mollify investors, even as it has had to delay expectations to slow its cash burn rate – £2bn is forecast to flow out this year. Its £1.3bn costs savings programme still has £300m to go (and another 1,000 of 9,000 job cuts), and it is nearing the sale of ITP Aero to a consortium led by private equity investor Bain Capital.
This will all make for a tough first few months for Anita Frew, the incoming chair. The Scot will take over from Sir Ian Davis at the end of this month, before embarking on an investor roadshow.
Frew and chief executive Warren East have no choice but to execute their plans for recovery as they wait for airlines to put long-haul planes with Rolls engines back in the skies. It is hard to see, too, how some more board expertise in the technologies of decarbonisation could be a bad thing.
However, Frew, East and the UK government must also prepare their longer-term defence against further sell-off pressure as Rolls-Royce confronts the challenge of net zero carbon emissions.
The temptation to offload the power systems business to pay down debt is obvious, but it should be resisted. Diesel generators are a mucky business that will be on its way out relatively soon, but other technologies such as fuel cells, hybrid power systems, and micro electricity grids using various fuels could all play a part in the future of the global economy in ways that are difficult to predict now, as well as potentially feeding technology back to lower aviation emissions.
At least there is no chance of an unsanctioned foreign takeover of Rolls-Royce, which is one of only two big defence companies in which the UK government still holds a “golden share”. For obvious reasons it has a veto on a sale of any part of the business serving the navy’s nuclear submarines, but it must also be consulted if Rolls-Royce wants to offload 25% or more of its other businesses.
Rolls-Royce is already used to the longest of lead times in civil aerospace and in defence – investments in technology at the frontiers of material science can take decades to pay off fully. Yet if ever there were a time to take an even longer view it is surely now, and the government should be wary of anything that could damage the ability of Rolls-Royce to drive forward lower-carbon power.
Beijing’s new stock exchange will extend the state’s control
Plans for a new stock market in China have heightened concerns that President Xi Jinping’s nationalist agenda is taking flight. The trading centre, due to be hosted in Beijing under Xi’s watchful eye, turns the “China first” rhetoric into something more concrete.
According to the official news agency, it will complement exchanges in Shenzhen, Shanghai and Hong Kong with a focus on much smaller companies. These make up the bulk of China’s economic output and have struggled to access credit finance from reluctant banks during the pandemic. Once listed on the new exchange, they can grow more quickly with funds borrowed directly from investors.
There is a logic to this narrative, but few in China believe this interpretation when it ignores the broader clampdown on the activities of Chinese companies at home and abroad.
Not so long ago, China was content for its largest companies to list in New York and other foreign jurisdictions and for rival overseas operators to dominate slugs of the domestic market. Not any more. In the name of “common prosperity”, Xi has launched a crackdown on a broad range of industries, leaving startups and decades-old firms alike to follow a more tightly controlled set of rules.
Reuters reports that officials want to have oversight of the algorithms used by Chinese tech companies and prevent them from listing abroad if they hold data that poses potential security risks or contravenes ideological norms.
China is also building its own cloud system – guo zi yun, or “state asset cloud” – in a direct threat to tech giants such as Alibaba, Huawei and Tencent Holdings, which are seen as following a western template in the way they operate.
Businesses in China are in the grip of a populist agenda, and the new Beijing stock exchange will be a significant part of that.
The Bank could have done better than an ex-Goldman pale male
Who’s Huw? That was the first reaction of most commentators when the Bank of England announced that Huw Pill, formerly of Goldman Sachs and more recently a lecturer at Harvard Business School, is to succeed Andy Haldane as chief economist at Threadneedle Street.
Pill seems to have a solid enough CV, but he had flown below the radar for most of his 30-year career. To be brutally honest, very few people had heard of him.
There’s nothing intrinsically wrong with that. Haldane was not a household name when he became the Bank’s chief economist, but he went on to use the platform to make a name for himself. Perhaps Pill will do the same.
But his relative anonymity is not the only reason for concern. For a start, the last two chief economists – Haldane and Spencer Dale – were plucked from the Bank’s own talent pool. Was there really no high-flying internal candidate seen as up to the job? It doesn’t say much for Threadneedle Street’s youth policy if there wasn’t.
Nor does the choice of Pill square with the Bank’s stated aim of becoming a more diverse organisation. Here was an opportunity for the governor, Andrew Bailey, to make good on his pledge to make the central bank more inclusive, and he spurned it.
Of course, it may well have been that Bailey was keen to make a more diverse appointment but that no suitable candidate came forward. Those who think that Pill is a good choice say the Bank should not be in the business of virtue signalling. This, though, is only a partial defence. Diversity is not just about gender or ethnicity: it is also about avoiding groupthink.
With the state of the global and domestic economies so uncertain, the Bank’s monetary policy committee has never been more in need of maverick thinkers. It is questionable whether another alumnus of Goldman Sachs will provide that.
