Shares in Rolls-Royce rise 7 per cent on buyback announcement

20 Jun 2014


Shares in Rolls-Royce rose 7 per cent in early trading with its announcement of £1-billion share buyback, shelving major acquisition plans.

Rolls chief executive John Rishton had been under pressure after a shock warning in February that the profit growth of a decade would come to a halt this year as shares took a hit from the defence-spending cuts.

The company had also faced a Serious Fraud Office probe over corruption claims, as it launched a share buyback. The buyback would be funded by proceeds of the sale of its energy gas turbines business to Siemens. The announcement sent shares surging from 62.5p, to 1072.5p, or 6 per cent.

However, that still left the shares around 20 per cent lower than at the start of the year. The move put an end to hopes that the company would make a large acquisition for rebalancing its business and offset the impact of cuts at the UK ministry of defence and the Pentagon.

It emerged earlier this year that the company had tried to acquire Finnish rival Wartsila, a move that would have boosted marine engineering work such as designing ships.

The deal would have been valued at around £8 billion, and even as talks almost immediately collapsed, analysts speculated that the company was on an M&A path.

Confirming financial guidance for 2014 and 2015, Rishton allayed fears of further downgrades following last week's news that Dubai's Emirates airline had cancelled an order for 70 A350 aircraft which would have been powered by Rolls engines. The order book took  a hit to the tune of £2.6 billion from the reverse (See: Emirates shocks Airbus, Rolls Royce; cancels $16-bn A350 deal).

In its first ever share repurchase Rolls-Royce plans to buy back as much as £1 billion in stock, according to the London-based company. The repurchase represents about 5 per cent of its market capitalisation.

The decision to return cash to shareholders beyond the company's dividend payments followed an unusually tumultuous 18-month period for one of the best -known engineering companies which makes engines for commercial aircraft, merchant ships, and naval vessels.

Rolls-Royce in May sold its industrial gas turbine business to Siemens for £785 million in cash, with the disposal due for completion this year (See: Rolls-Royce to sell energy gas turbine and compressor business to Siemens for $1.33 bn).

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