Last month, Rolls-Royce Holdings (LSE: RR) suffered a setback in its target to raise “at least” £2bn from disposals.
The disposal programme is part of a root-and-branch restructuring and refinancing programme undertaken by the company after suffering a body blow from the pandemic. Rolls-Royce shares were among the hardest hit by the crisis because of the damage to the underlying business. And, for a while, the very survival of the firm was in question.
A setback for Rolls-Royce Holdings shares
On 4 February, the company announced the proposed sale of its Norway-based Bergen Engines business because the enterprise is a non-core activity. The buyer was to be Russian rail and transport conglomerate Transmashholding (TMH). And Rolls-Royce stood to raise a much-needed $180m or so from the deal.
Perhaps I should have smelled a potential problem. The Norwegian government certainly did because it blocked the deal. The reason is that Norway is a member of NATO and its navy and coast guard forces use Bergen-built power plants. The Norwegian government reckons a Russian-owned supplier would introduce security concerns. And that’s because Norway doesn’t enjoy security cooperation with Russia.
So Norway’s government invoked a “rarely used” national security law to permanently block the sale. However, in an announcement on 23 March, Rolls-Royce said it had “followed the appropriate process in contacting the authorities in advance of the announcement of the sale.”
And the company has also cooperated with the government and paused the divestment. But the company wants the Norwegian government to assist in finding an alternative buyer for Bergen.
Long-term optimism for recovery
I admit to being a bit sceptical about the outcome of that request. My guess is Rolls-Royce could be on its own in such commercial matters. However, I see the whole episode as a delay to the divestment programme rather than a failure. In the meantime, the company has likely already done enough to survive until the world fully emerges from the coronavirus crisis.
Of course, what Rolls-Royce needs now is a full ramp-up in engine flying hours to really gain traction with its recovery. Much of the business depends on normal flying activity for revenue, cash flow and earnings. But the outlook is optimistic, especially now that vaccination programmes are gathering pace around the world.
However, there’s still a question mark over how long the airline industry will take to return to 2019 levels of activity, if it ever does. There’s a chance that travel habits might have changed permanently for many. And we could see a smaller air industry in the future.
But I reckon Rolls-Royce will survive whatever happens next. Whether or not it will make a decent stock investment from here on is a difficult question. One thing I’m wary about is the company’s big debt load. The share price has been marking time this year and I reckon that’s the correct response by the stock market.
Rolls-Royce Holdings shares may prove to be a satisfactory hold for the long term. But I’m not in a tearing hurry to buy them now.
