ValueAct Capital Discloses Rolls Royce Stake; GreenWood's Thesis on Rolls ~ market folly

Friday, July 31, 2015

ValueAct Capital Discloses Rolls Royce Stake; GreenWood's Thesis on Rolls

Jeff Ubben's activist firm ValueAct Capital has filed a regulatory disclosure in the UK regarding shares of Rolls Royce (RR.L)

ValueAct Starts Rolls Royce Stake

The filing indicates that ValueAct now owns 5.44% of Rolls Royce's (RR.L) voting rights.  The filing was made due to activity on July 29th and their are now the largest shareholder.

Per the FT, Rolls Royce in a statement said that, "ValueAct has been an investor before and we constructively engaged with them before.  We welcome any investor who recognises the long-term value of our business.  We look forward to engaging with ValueAct, just as we do with all investors."

Just last week, we highlighted how Steve Mandel's Lone Pine Capital is short Rolls Royce.  So now we have a bit of a battleground stock with prominent investors involved on both sides.  However, given the investment timeframes of longs versus shorts, both sides could still potentially end up winning.

Lone Pine is plausibly betting on the near-term pain at Rolls as some of their business units suffer from oil and gas exposure amidst the decline in oil prices and their Trent 700 engine sees a dip as purchasers wait for a newer, more efficient engine and airplane (Airbus A330neo).

ValueAct, as a long investor, is probably looking to capitalize on a turnaround in Rolls' business under new CEO Warren East.  They're typically long-term holders anyways and would seemingly be fine with riding out any turbulence in the near-term. 

Ruane Cunniff's Sequoia Fund is also a long-term holder of Rolls shares.  In their 2014 annual letter, they lamented that, "Management and the board seem stubborn and entrenched, and it may take a tough-minded activist to force strategic change."  Well, now they have both: a new CEO and an activist in ValueAct.  Sequoia feels that "Rolls' wounds are self-inflicted and reversible."  They also really like the company's "world class business making engines for wide body jets" due to the high barriers to entry.

ValueAct seems to be bullish on the aerospace industry in general and engines in particular.  During the first quarter of this year, they also initiated a new $119 million stake in Precision Castparts (PCP). 

Numerous other prominent investors were buying PCP shares such as Berkshire Hathaway, Lou Simpson's SQ Advisors (he previously worked at Berkshire as well), Soroban Capital, Vulcan Value, Farallon, Third Point, and Eminence Capital, among others.  Sequoia also owns PCP and bought more in Q1 as well.

PCP makes castings, forgings, fasteners and more, and many of their parts go into aircraft engines.

GreenWood's Thesis on Rolls Royce

Steven Wood of GreenWood Investors also recently took a stake in Rolls Royce and posted his investment thesis on the name.

You can quickly get up to speed on the name and see his suggestions that the company should perhaps vertically integrate more to follow in the footsteps of their competitor, GE Aviation, to play catch up in margins.

Embedded below is Greenwood's investment thesis on Rolls:

You can download a .pdf copy here.

For more from ValueAct, you can view some of their other recent portfolio activity here.

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