By Robert Wall 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 18, 2018).

LONDON -- British aircraft-engine maker Rolls-Royce Holdings PLC on Wednesday said it may sell its commercial-marine business, joining rival industrial giants such as General Electric Co. in taking steps to reinvent themselves under pressure from activist investors.

Rolls-Royce, a major supplier to Boeing Co. and Airbus SE, said it would focus on commercial aerospace -- which generates most of its sales and profit -- as well as its defense and power-systems businesses. The company is no longer affiliated with the luxury-car maker of the same name.

The company has launched a strategic review of its commercial-marine business, which has cut staff levels by 30% in recent years amid slack demand. The division, which sells ship engines and designs vessels, generated sales of GBP1.1 billion ($1.52 billion) in 2016 but made a GBP27 million loss.

Wednesday's announcement, which as well pointed to other streamlining steps and possible layoffs, surprised investors, with the company's stock surging 5.4% to GBP9 in London.

Rolls-Royce announced the move a day after larger rival GE said it was considering breaking itself apart. Investors including activist Trian Fund Management have pressured Boston-based GE to cut costs and revamp its operations.

Last year, Honeywell International Inc. said it would spin off its home and transportation businesses, winning over activist investor Third Point, which had pushed the Morris Plains, N.J.-based company to streamline.

Rolls-Royce is also under pressure to improve its financial performance. Activist investor ValueAct Capital Management LP in 2016 won a seat on the company's board after becoming its largest shareholder. As part of the deal to gain board representation, ValueAct agreed not to push for changes in Rolls-Royce's strategy or publicly challenge management for about two years. That agreement runs until the next shareholder meeting, which is expected in May.

Chief Executive Warren East said a need to simplify the company's structure, rather than pressure from ValueAct, drove the decision to consider options for the commercial-marine business. He also said the business would require future investments, which Rolls-Royce may not be willing to make.

The business review is expected to run into the second half of the year, Chief Financial Officer Stephen Daintith said. "We are aware there are those that are interested in our commercial-marine business," he said, without identifying potential buyers.

Rolls-Royce makes engines to power warships, including Britain's new aircraft carriers, and that part of its marine division would remain in company hands, Mr. East said. The naval business, which accounted for about 25% of marine sales, was profitable, the company said.

The new strategic review marks the highest-profile step that Mr. East has taken to boost Rolls-Royce's profitability since he took the helm in 2015 following several profit warnings from the London-based company. Since then, it has overhauled management and closed some sites. Also, last week it said it was considering strategic options for L'Orange, a part of its power-systems operations.

Mr. East said that after several years of trying to put Rolls-Royce on firmer financial footing, 2018 could be a breakthrough year.

"Taking this action now will help secure the long-term benefit for our business and stakeholders of the growing cash flows that will be generated over the coming years," he said.

Mr. East has previously promised investors that the company will generate at least GBP1 billion in cash by 2020.

Rolls-Royce on Wednesday said it plans to further simplify and restructure the business, with details on job cuts and other steps to accompany the release of full-year results next month.

"We must address the imbalance and duplication between our corporate functions and our three business units, as well as the cost of our corporate head office," Mr. Daintith said. "Costs and complexity within our business remain too high."

Write to Robert Wall at robert.wall@wsj.com

 

(END) Dow Jones Newswires

January 18, 2018 02:47 ET (07:47 GMT)

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