Rolls-Royce self-harms by selling family silver

Rolls-Royce’s plans to flog chunks of the family silver look like self-harm. Although the 2 billion pounds ($2.6 billion) it hopes to raise will please the struggling British jet-engine maker’s lenders, Rolls will be left with a permanent limp, assuming it eventually recovers from the damage caused by Covid-19 lockdowns.

The 5 billion pound company is having a particularly bad crisis. Normally, revenue from servicing jet engines accounts for a third of Rolls’ top line, and a far higher proportion of profit. With airline fleets grounded worldwide, service revenue has almost halved, pushing the group to a 1.7 billion pound first-half operating loss. Unwinding a currency hedge added another 1.5 billion pound layer of misery.

Chief Executive Warren East’s brave face is starting to show signs of fatigue. Although flying hours are creeping upwards, the company is expecting 2021 hours to be 30% below 2019 levels. And it could get much worse. Under what the earnings release called a “severe but plausible” scenario of further travel restrictions, Rolls might not be a “going concern”.

With his corporate credit card all but maxed out, East is having to look elsewhere for cash to keep aloft. ITP Aero, a Spanish subsidiary that makes turbine blades for jet engines, is on the block. It won’t be a seller’s market for an asset whose operating profit slid by more than two-thirds in the last six months to just 10 million pounds. And in terms of corporate synergies, losing a maker of jet-engine turbines inside a maker of jet engines sounds very unhelpful.

The alternative to selling assets is selling shares. Current shareholders might balk, especially as the amount needed to stabilise the corporate flight path is greater than Rolls’ current market valuation, according to a JPMorgan analysis. The UK government, which owned the ancestor of the current Rolls-Royce from 1971 to 1987, might need to help.

That sort of rescue may not be appealing, especially if it involves a debt restructuring. But selling the family silver only works if you’ve got something else to eat off.