Rolls Royce marine: High rollers

When Roll-Royce bought Vickers in 1999, it was accused of having more money than sense but, as Mark Venables explains, acquiring Vickers Marine Services Division was just one part of the aerospace giant’s bigger plans to rule the waves

When Rolls-Royce paid £576m for Vickers in September 1999 the general feeling was that, at a 53% premium to the share price, it had paid too much. The stock market concurred with this sentiment and the shares, which had hit a high of 300p earlier in the year, tumbled by more than 10 pence to 215.25p.

The surprise deal was concluded in less than a week by Rolls-Royce chairman Sir Ralph Robins and Vickers chairman Sir Colin Chandler, the unusual haste being attributed to other predatory companies, notably TI Group, lurking in the wings.

The market reacted negatively to the acquisition. `We think the strategy is very risky,’ an analyst said at the time. `In many ways it was an admission that they couldn’t find anything better to do with their cash.’

Perhaps more significantly for the company, people struggling for a rationale behind the acquisition began to question the strength of the company’s core business. City analysts began to question the industrial logic behind the deal. As one analyst put it: `The Vickers takeover of Ulstein is still unproved, and for Rolls-Royce, maybe it gives you a clue that they are not as confident about their strategy in the aerospace market as they led us to believe.’

Rolls-Royce was convinced, however, that it had identified a significant opportunity to develop a market-leading marine business. Vickers was attractive to Rolls-Royce because of its Marine Systems Division with its strong brands: Ulstein Aquamaster azimuth thrusters, Kamewa Ulstein controllable pitch propellers, Kamewa water jets, Brown Brothers stabilisers and Rauma Brattvaag deck machinery.

Rolls-Royce already had a strong marine heritage. Its 19.5MW Spey gas turbines power nine classes of ship including the Type 23 frigate used by the Royal Navy. Derived from the successful TF41 aeroengine, the marine Spey has accumulated more than 500,000 running hours at sea. The Royal Navy aircraft carriers Illustrious, Invincible and Ark Royal are each powered by four Rolls-Royce Olympus gas turbines.

With the Vickers purchase in the bag, Rolls-Royce began restructuring the company to create a separate marine division to attack what it believes will be a multi-billion pound market over the next 20 years – with as much growth potential as its civil and defence aerospace business.

Expanding into the marine market

The man charged with delivering this growth is Bob Sunerton, managing director of the marine division. Sunerton began his working life as an apprentice at British Thomson Houston, then worked for AE Group, Courtaulds Engineering and GEC Electrical before joining Rolls-Royce’s Industrial and Marine Division in 1977.

At Rolls-Royce he rose to become managing director, successively, of the GEC/Rolls-Royce (Power Generation) joint venture, then Rolls-Royce Industrial and Gas Turbines, and Rolls-Royce Nuclear Energy.

Sunerton is still busy integrating the Vickers companies into the Rolls-Royce fold: `It’s going pretty well,’ he ventures. `It’s an interesting task as we’re all different cultures, national cultures, industry background cultures. We have an organisational model within the company where we concentrate on customers, which is why we have within the marine business two fundamental customer-facing areas; one is naval and the other is commercial marine, and again they subdivide.’

He remains convinced that the underlying strategy of creating a marine arm to mirror the success of the aerospace division is fundamentally sound. `If you look back on the way the company as a whole has been developing it is consistent with our policy and strategy of developing in markets that have growth and in markets to which we can contribute,’ he says.

Rolls-Royce is structured around four main business groups. Civil aircraft, which is the biggest group, and defence aerospace are the two mainstream Rolls-Royce businesses. It has also been growing in the energy sector.

The fourth element, the marine business, has traditionally been geared to naval requirements, but with the acquisition of Vickers, it began to aim for a broader range of products. `We needed to gain access to the commercial marine market,’ says Sunerton.

Growth areas being targeted include the booming cruise ship market, as well as new innovations such as high-speed ships. Acquiring Vickers and its subsidiaries such as Ulstein has suddenly given Rolls-Royce significant market shares in water jets, thrusters, propulsion parts and steering gear – the technology which lies at the heart of the FastShip freighter concept.

`The market we are interested in is the specialist ship market, ships where the propulsion and control system represent a fairly high proportion of the total cost,’ says Sunerton. `There’s also a huge volume of big container ships that take cathedral-style diesels, for example. We’re not in that business, and are not interested in being in it.’

Rolls-Royce is, however, working in partnership with Northrop Grumman to develop the WR21, a highly fuel-efficient gas turbine which has just completed its second endurance test in Philadelphia.

The 25MW engine is said to achieve fuel efficiencies comparable with diesel systems, but with the advantages of compact size and reduced maintenance offered by gas turbines. It uses proven technology from the Rolls-Royce RB211 and Trent engines at its core and is being tendered for use in the Type 45 destroyer.

The marine Trent gas turbine has been selected as the power plant for the FastShip project. Five Trents will power these new £265m super-fast transatlantic cargo vessels. The Trent takes aero-derived marine gas turbines above 50MW for the first time.

As part of the acquisition of Vickers, several prominent brands were also acquired and, as Sunerton explains, they will still be marketed as part of the Rolls-Royce portfolio: `We use the Rolls-Royce name as a headline, but we are maintaining these brand names we’ve acquired at a product level, because they’re important to the market. Customers recognise them where they don’t necessarily recognise Rolls-Royce. Fishing boat operators want to buy an Ulstein or Aquamaster, they don’t want to buy a Rolls-Royce.’

Sunerton, who is putting the finishing touches to a five-year plan, is reluctant to say how much he expects the business to expand.

Current turnover is close to £900m and the marine division employs 8,000 workers in 33 countries, with manufacturing in eight of these.

The global market for marine products is hard to quantify, but it could be worth as much as much as £300bn over the next 20 years.

Sunerton concludes: `We see the market continuing to grow particularly in specialised areas – cruise ships, fast ships and cable-laying ships – buoyed by a resurgence of the offshore market. This acquisition was about growth, not about buying something and doing a rationalisation. For the business to expand there has to be something we can improve.’

Plain sailing from here?

Further acquisitions are not ruled out, but growth in the UK will be mainly on the back of expected naval orders. Currently in the UK there is the Astute submarine programme, and forthcoming projects include the Future Attack Submarine, the Type 45 destroyer, the Future Carrier and the Future Surface Combatant which will replace the Type 23 frigate.

UK shipbuilders have not been very successful recently in the commercial marine market, although Harland and Wolff has some orders and is working with Rolls-Royce.

In the nine months since the Vickers acquisition, Rolls-Royce’s share price has strengthened to 250p, as the market acknowledges the strong performance of the company’s aeroengine division, and that there was no hidden agenda behind the purchase.

`Although the Vickers integration is not yet complete the market seems to be taking a more positive attitude to Rolls-Royce,’ says Commerzbank analyst Brian O’Keefe.

`The aerospace business is increasing its market share in wide-bodied aircraft, which is a growing sector, and that has alleviated fears regarding that side of the business.’

He adds: `Rolls-Royce has done the right things to please the market. It has taken action to reduce costs and focused on areas of strong growth. However, we still need to see evidence that the marine division will provide growth.’

The good news for Rolls-Royce is that the strengthening of its share price is mainly due to the performance of the aeroengine division – so if the marine division can fulfil its promise, the share price will almost certainly continue to grow further.