Chris Blackhurst: Rolls-Royce should merge with BAE Systems

The Government has got itself into a pickle over Rolls-Royce.

Five profits warnings in less than two years have forced Downing Street to consider the future of the engine-maker.

Of particular concern, apparently, is “that Rolls-Royce’s management has no substantial experience of defending against hostile takeovers”.

When I read this in the FT, attributed to sources familiar with the plans, I did a double-take.

The Government has a “golden share” in Rolls-Royce that prevents the company from selling 25% or more of its net assets or 25% or more of the strategically sensitive nuclear division without its permission.

In addition, a foreign investor cannot hold more than 15% of the group.

These clauses were inserted into the company’s constitution when it was privatised in 1987.

A hostile foreign bid is highly unlikely, so that narrows down the scenarios to an aggressive UK move.

Only one fellow engineer — BAE Systems — is capable of mounting such an attack.

Or a strike could come from a finance house, from private equity, possibly a consortium with a view to breaking up Rolls and selling off the parts.

It’s curious the Government should zone in on the management’s lack of hostile takeover expertise.

Such has been the lack of hostile M&A in recent years that I’m struggling to think of anyone who would tick this box.

My cynical suspicion is that this is polite code for “we don’t rate Rolls-Royce management highly, not in the situation the company now finds itself”. Who they’re really talking about is Ian Davis, the ex-McKinsey consultant now Rolls chairman, and former ARM chief Warren East, parachuted in as chief executive earlier this year.

Davis lacks experience in this field, at this level. East left ARM in 2013 and had picked up a nice portfolio of part-time appointments. It’s difficult to imagine him relishing the full-on workload that now confronts him.

The pressure on both men is intense, especially with activist shareholder ValueAct stoking the flames.

They strengthened the board with the appointment as a non-executive director of Sir Kevin Smith, formerly of GKN and BAE, and today cut two senior bosses in a revamp of its structure.

Even so, officials would be forgiven for looking across at another defence contractor and wishing its chairman was at Rolls-Royce.

BAE chairman Sir Roger Carr loves the public cut and thrust, can glide smoothly along the corridors of power, and knows which doors to open and palms to press.

He is also a chairman who has been on the wrong end of a hostile takeover. He lost that fight, at Cadbury’s, but no one is more versed in the art of media and political persuasion than Carr.

He has enjoyed a good dust-up ever since his days at Williams Holdings, Centrica and Mitchells & Butlers, and as president of the CBI.

He has become vice-chairman of the BBC Trust just as the broadcaster’s future is under renewed scrutiny.

I would not be shocked if quiet words have already been exchanged between Carr and the ministers and mandarins. Given the extensive nature of Smith’s CV, it is inconceivable the two don’t know each other.

A marriage between Rolls-Royce and BAE looks increasingly like a neat solution to a gaping problem.

The two companies co-operate extensively on military aircraft and the Trident nuclear submarine programme, and will again on the mooted next generation of Successor submarines.