Rolls-Royce is to return £1bn (US$1.7bn) to shareholders in the form of a share buyback and abandon plans to buy a rival company in a move aimed at restoring investor confidence. The buyback is the first for the UK aero engine manufacturer since its privatisation in 1987.
The company’s shares, which had lost 17% over the past six months, climbed sharply on the announcement. Rolls-Royce had unsettled investors in January this year when it revealed a €8bn takeover approach to Finnish engine producer Wartsila. While ultimately unsuccessful, the move raised questions on whether the company might be spending indiscriminately in an effort to boost earnings.
Addressing investors, Rolls-Royce chief executive (CEO) John Rishton admitted that the company could do more to improve its corporate communications. In addition to the attempted acquisition, investors have also been upset more recently by a profits warning and a cancelled order.
He said that from October, Rolls-Royce will begin issuing its outlooks in percentage and number terms, instead of its historic references to ‘good’ or ‘modest’ growth. The company also plans to reduce group capital expenditure to 4% of underlying revenue over the next three to five years, from 4.9% at the end of 2013.
Responding to the announcement Fitch Ratings said there was no immediate impact on Rolls-Royce’s A/Stable rating, with the buyback representing the distribution of proceeds from the planned sale of the company’s energy gas turbine and compressor business to Siemens. Rolls-Royce will receive £985m on completion of the deal, which was announced in May and is expected to close by the end of 2014.
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