Rolls-Royce Considers Disposal of Energy Assets to Siemens

Apr 30, 2014 3:18 am ET

(Updates with stock reaction in fifth paragraph.)

April 30 (Bloomberg) -- Rolls-Royce Holdings Group Plc said it’s in talks to sell power-generation assets to Siemens AG, adding to a flurry of possible cross-border deals as some of Europe’s largest engineering companies reshape their portfolios.

The planned disposal concerns the energy gas turbine and compressor business, Rolls-Royce said in a release, confirming the talks with Munich-based Siemens reported by Bloomberg News earlier yesterday. London-based Rolls-Royce said negotiations have not concluded, which concern gas turbines derived from aero engines, as well as compressor systems and related services.

A disposal of most of Rolls-Royce’s energy portfolio, which had revenue of 1.05 billion pounds ($1.8 billion) last year, would further retool the European energy-generation landscape, as Siemens and General Electric Co. work on competing offers to Alstom SA, the French maker of power-transmission and transportation equipment. Siemens said yesterday it’s weighing on an approach to the Paris-based company, less than a week after GE’s interest in Alstom assets became known.

“From a management perspective, we think energy has been an unnecessary distraction that’s margin dilutive, while the nuclear assets remain strategic and relatively self sufficient,” RBC Capital analyst Robert Stallard said of Rolls- Royce’s intention to consider a sale of some assets.

Alstom Outcome

Rolls-Royce gained as much as 17 pence, or 1.7 percent, to 1,038 pence in London, and traded at that level as of 8:14 a.m. Siemens was little changed at 95.15 euros in Frankfurt.

The German engineering firm is interested in Rolls-Royce’s energy businesses outside of the nuclear industry, and discussions coincide with plans to bid for Alstom, people said earlier today, who asked not to be identified because talks are private. Rolls-Royce’s energy unit is its smallest by revenue.

A deal with Rolls-Royce or Alstom would let Siemens Chief Executive Officer Joe Kaeser expand the energy business as he tries to improve profitability and catch up with rivals General Electric Co. and ABB Ltd. of Switzerland. Siemens said yesterday that it’s willing to bid for Alstom, provided it gets detailed access to the company’s books, setting up a competition with GE for the manufacturer of France’s electricity grid.

A representative of Siemens declined to comment. Rolls- Royce said it would “make a further announcement in due course.”

Aircraft Engines

The likelihood of a deal with Rolls-Royce may be influenced by the outcome of the talks with Alstom, the people said. Still, Siemens could execute both deals, they said. The German company may announce a transaction with London-based Rolls-Royce as early as May 7, when Kaeser is scheduled to present the findings of a strategy review, they said.

Siemens’s offer for Alstom would probably entail swapping some of its rail assets for the French company’s energy division to create two “European champions,” French Industry Minister Arnaud Montebourg has said.

Siemens would become one of the world’s largest manufacturers of equipment for power plants and electric transmissions, while the companies’ train assets would form a France-based rail leader, uniting Siemens’s ICE high-speed trains with Alstom’s TGV.

Undecided

Siemens hasn’t yet decided whether to bid for all or part of Alstom, one person familiar with the matter said before the German company made its statement today.

Rolls-Royce’s energy unit generated 68 percent of its revenue from oil and gas operations, while 21 percent came from power generation and 11 percent from the nuclear industry, according to the company’s 2013 annual report.

The U.K. engineering company is the world’s second-largest maker of civil aviation engines, providing powerplants for Airbus Group NV and Boeing Co. airliners. Its main rival is GE, the world’s No. 1 maker of aircraft engines. Rolls has made purchases to strengthen its industrial engines business, and the company considered a takeover of Finnish marine-engine maker Waertsilae Oyj earlier this year before talks ended.

Siemens doesn’t provide turbines for the aviation industry, and focuses instead on steam and gas turbines that it makes in Germany and North America.

The Munich-based company has been seeking ways to capitalize on the boom in shale gas from hydraulic fracturing, calling it a main driver for years to come.

--With assistance from Christopher Jasper in London.