Rolls-Royce Holding PLC Falls On Acquisition News But Still Leads BAE Systems plc And Cobham plc

Shares in Rolls-Royce Holding PLC (LON: RR) are still ahead of BAE Systems plc (LON: BA) and Cobham plc (LON: COB) year-to-date

Rolls-Royce Holding PLC
Rolls-Royce Holding PLC

Shares in Rolls-Royce Holding PLC (LON: RR) (LSE: RR.L) have fallen by 2% today following news that the company will purchase the outstanding 53.1% shareholding in Industria de Turbo Propulsores SA. Rolls-Royce will pay a total consideration of €720 million, with the deal obviously being subject to due diligence.

Rolls-Royce believes that the acquisition will strengthen its position on its Civil Aerospace large engine growth programme by capturing substantial additional value from its long-term aftermarket revenues. This includes the high volume Trent 1000 and Trent XWB engines, in which ITP has played a pivotal role with regard to risk and revenue in particular.

Further, today’s acquisition will also improve Rolls-Royce’s services and manufacturing potential, with it benefitting the company’s Defence Aerospace business.

The agreement allows Rolls-Royce to settle up to a maximum of 50% of the total consideration in shares, which provides the company with a degree of flexibility. Whether payments will be settled in cash, or cash and shares will be determined by Rolls-Royce during the payment period. Additionally, since ITP has exercised its put option, Rolls-Royce will settle over a two-year period following completion in eight equal, evenly spaced instalments.

In 2015, ITP’s revenues were €710 million, with profit after tax being €59 million. Gross assets were €1.7 billion as at 31 December 2015.

Despite what appears to be positive news, shares in Rolls-Royce have fallen by around 2% today. However, they are still up by 25% since the start of the year, which is well ahead of aerospace and defence sector peers BAE Systems plc (LON: BA) and Cobham plc (LON: COB). BAE Systems is up by 8% year-to-date, while Cobham is down by 43% as its financial outlook has been hurt somewhat by recent updates.

Rolls-Royce has a P/E of 29, which is high relative to a number of its sector peers. However, the market has priced in EPS growth of 32% next year and with it having a new strategy as well as international operations that could benefit from weaker sterling, it seems to be relatively appealing in my view.

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The author owns shares in BAE Systems at the time of writing.

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