Concerns are growing over the future of Rolls-Royce after it emerged the government has drawn up contingency plans to nationalise part of the power systems engineering firm if the crisis facing it worsens.
Shares in Rolls fell on Monday as investors digested reports that the government could nationalise the company’s nuclear submarine business or force it to merge with defence manufacturer BAE Systems.
Analysts played down the prospect of either deal taking place, but the fact that the government, one of Rolls’ biggest customers, is contemplating these options highlights how concerned it is about the FTSE 100 engineer.
The government holds a golden share in Rolls which allows it to block a takeover by a foreign bidder and restrict any foreign investor from holding more than 15% of the company’s shares.
This restriction has become increasingly relevant because ValueAct, an activist investor based in California, has built a 10% stake in Rolls and is pushing for a seat on the company’s board.
Rolls is under pressure after issuing five profit warnings in less than two years. The company’s share price has fallen by almost 40% this year as it struggles against government cuts to defence spending, the falling oil price and weakening demand for the wide-bodied commercial aircraft Rolls makes engines for.
The government contingency plans are in case the performance of Rolls weakens further. The plans, first reported by the Financial Times, include taking control of the arm of the business that powers Britain’s nuclear submarines. This would potentially allow a foreign investor to either acquire Rolls or pump emergency funds into the company by buying a stake larger than 15% without national security being compromised.
Another option would be to merge the nuclear division of Rolls, or the whole company, with BAE. Both companies are a key part of the project to build new nuclear submarines to replace the UK’s Trident programme.
Sir Vince Cable, the former business secretary, said the government should consider buying its own stake in Rolls. Cable told Sky News that “anything which fundamentally threatens to diminish the value of Rolls-Royce could be a trigger for the government to take a stake”.
Analysts said the government was conducting a “sensible” review of its plans to replace Trident, which will cost £31bn, and that Rolls was still financially robust.
Sandy Morris, analyst at Jefferies, said Rolls was investing £750m a year in research and development and £600m on new infrastructure. He added: “I think the government being totally on top of Trident, and how they’re going to manage it and the supply chain, is only sensible.”
Howard Wheeldon, an independent analyst, said: “To suggest that nationalisation is even a thought process in the minds of anyone currently, let alone that it may become a possible issue, is irresponsible in the extreme.
“Yes, Rolls-Royce may have a US shareholder breathing down its neck, and that [ValueAct] has been reported as wishing to see parts of the group hived off.
“I doubt that will occur and I very much hope that it will not. The sum of the parts is what makes Rolls-Royce what it is and provides it with global strength.”
Shares in Rolls closed down 2.63% at 537.50p on Monday.
A Rolls spokesperson said: “We are in contact with government as a matter of routine and regularly keep them updated on our performance and progress.”
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