ValueAct Capital Doubles Rolls Royce Stake ~ market folly

Tuesday, November 24, 2015

ValueAct Capital Doubles Rolls Royce Stake

Jeff Ubben's activist firm ValueAct Capital now owns 10% of Rolls Royce (RR.L / RYCEY), according to a regulatory filing with the company.  The investment firm crossed the required threshold on November 18th.

We highlighted when ValueAct initially took a Rolls Royce stake earlier this year.  Back then, they owned 5.44% of the company and since that disclosure shares have fallen around 21% and they've utilized the dip to increase their stake.

The company's new CEO Warren East recently issued another profit warning and is laying out his plans to turnaround the airplane engine maker.

Rolls has been hit in the near-term with its exposure to the oil and gas industry via some of its other business lines.  Additionally, the company has seen some dips in their aerospace segment (especially with its Trent 700 engine) as customers wait for newer, more efficient engines and airplanes to be delivered.

It seems as though ValueAct likes the company's duopoly position in the widebody aircraft engine industry.  However, they're probably looking for the company to improve margins and rationalize their production lines. They've also been pushing for a seat on the board at Rolls, but thus far haven't been granted access.

ValueAct, as a long term investor, probably sees this as an ideal turnaround story and are willing to take the near-term pain as East begins to dig in at the company.  Rolls sells its engines at a loss or break-even but then earns money on service contracts over the lifetime of the engine. 

As RR delivers more and more of their newest engines (on planes such as the Airbus A350) their installed base of service contracts is set to expand dramatically.  The company just has to get through the rough patch until then.

You can view additional portfolio activity from ValueAct here.

Per Google Finance, Rolls Royce is "a United Kingdom-based company that designs, develops, manufactures and services power systems for use in the air, on land and at sea. The Company operates through two divisions: Aerospace and Land & Sea. The Aerospace Division produces aero engines for large civil aircraft and corporate jets and provides defense aero engines and services. The Land & Sea Division comprises power systems, marine and nuclear businesses. The power systems business is involved in the development, manufacture, marketing and sales of diesel engines and power systems. The marine business is engaged in the development, manufacture, marketing and sales of marine power propulsion systems and aftermarket services. The nuclear business is involved in the development, manufacture, marketing and sales of nuclear systems for civil power generation and naval propulsion systems."

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