The sale of defence company Vickers’ trophy asset, Rolls-Royce Motor Cars, has attracted much industry interest, especially with the Crewe-based company due to launch new models next year (The Engineer, 28 September).
Vickers wants to make a killing from the sale but knows it must play its cards carefully, especially after the mooted hostile takeover bid by automotive components supplier Mayflower. However, Vickers’ freedom of action over the sale is more limited than might at first appear.
The Engineer spoke to three automotive industry analysts, who preferred not to be identified.
Why? Because Vickers is believed to be manipulating news about the Rolls-Royce sale. One analyst said: ‘Everything is being pre-announced and pre-leaked by Vickers.’
Vickers says the Rolls-Royce sales information memorandum will go out within the next two weeks ‘to those parties who have expressed an interest and are considered to be credible’. Vickers expects the sales process to be completed by next spring.
Many firms are keen to look at these documents, but only a handful may be considered credible bidders.
Vickers is confident Lazard Brothers, the merchant bank handling the sale, can assess bidders correctly. A Vickers source said: ‘I’m sure it will be able to sort the wheat from the chaff’.
But the list of possible credible bidders is small. Despite last week’s publicity, a Volkswagen takeover was described as ‘extremely unlikely’ by one analyst. ‘It’s difficult to see what sort of synergies exist between VW and Rolls-Royce,’ he said.
Ford, which issued a qualified denial of its interest after reports to that effect, is also described as ‘pretty unlikely’ while General Motors is called an ‘unlikely’ bidder.
Daimler-Benz, another rumoured bidder, is busy with its own challenges over the stability of its new A-class. It would not relish another humiliation from BMW, which stole the mantle of being nominated as the engine supplier for Rolls-Royce.
The rumoured interest from Toyota, or from an investment group linked to Fiat, is an unknown quantity. It is also uncertain if unspecified equity management groups which are alleged to be interested in Rolls-Royce will maintain their interest.
The analysts agree BMW is still the probable winner in the battle for Rolls-Royce, hence the view that the struggle is being hyped.
‘You’ve got Vickers supposedly conducting an open auction of a viable business unit,’ one said, ‘but you’ve got two independent companies who can scupper the deal’ – BMW and Rolls-Royce aeroengines.
BMW’s engine supply deal gives it the power to withdraw the V8 and V12 engines, while the eponymous aeroengine firm controls the way the R-R marque is used.
‘If you bid for Rolls-Royce, you’ve got to outbid BMW in cash terms,’ another analyst observed. ‘You’re going to have a lot of cost to bear in terms of redesigning the engine if BMW pulls out.’
This cost could be as high as £100m, though perhaps VW may be able to bear this.
The overhead for a new owner supporting what is in effect a small business will be high. ‘There are lots of reasons why buying Rolls-Royce makes sense for BMW and why BMW is the inevitable winner,’ oneanalyst concluded. ‘BMW’s offer is not going to be very high, but Vickers is trying to talk the price up and engender the atmosphere of a competitive bid,’ he said.
A £400m price has been put on Rolls-Royce, but analysts are more cautious. ‘A more likely outcome is less than £300m,’ one claimed.
The interest in Rolls-Royce is driven by the awareness that the company has well-developed plans to launch new Rolls-Royce and Bentley four-door sedans. These are expected to expand Rolls-Royce’s normal customer base, altering the firm’s image to attack a larger market which is less obsessed with a traditional luxury car image.
The new cars are due for launch next spring say market watchers. But Vickers will only say ‘the launch will take place this side of 1999’.
Vickers is happy with the the new Rolls-Royce and Bentley designs. ‘We’ve had independent advisers taking a look at the new vehicles and the concept and the response has been extremely encouraging.’
The only other engines which could be used in the new Rolls-Royce are from Mercedes-Benz, the originally nominated engine supplier. But a dark horse may be VW’s W12 engine, which ‘could in theory go into the new Rolls-Royce luxury car’, an analyst conceded.
‘The next car should improve the economic fundamentals of Rolls-Royce. In the next two to three years they’ll make bumper profits,’ he predicted.
Vickers has said it will dispose of Rolls-Royce and its medical business to raise cash. What will it do with it?
With Schroders as Vickers’ largest shareholder, there is pressure on the company to make sure shareholders reap real dividends.
Vickers’ story on what it would do with the cash from the sale of Rolls-Royce has changed – ‘quite a fluid story’ said one analyst. At first it said it would reinvest it. But when shareholders expresed disquiet, Vickers said it would reinvest the proceeds and return some to shareholders.
There are also well-sourced and possibly share price driven suggestions that Vickers is interested in taking over GKN’s armoured vehicles business.
But this will depend on the price Vickers reaps from Rolls-Royce and whether the two probable frontrunners, BMW and VW, can stump up sufficiently attractive offers.