The bad news keeps on coming for Rolls-Royce (RR.). Little under a month after the once hero of British manufacturing issued its fifth profit warning in under two years, star fund manager Neil Woodford put an end to his 10-year relationship with the company by dumping his £230m stake at a loss.
Mr Woodford, who is renowned for his long-term approach to investment, admitted that a series of unsettling trading updates had "shaken" his confidence in the group's business model. In a blog post titled 'engine trouble', the fund manager revealed his previous strategy of using share price weakness to top up had run out of steam once it became clear that the problems plaguing the military and marine businesses had spread to the core civil aerospace operations. This scenario, he said, raised the likelihood of dividend cuts in 2016.
Mr Woodford isn't the only major shareholder to lose patience. According to data from Morningstar, Zurich, Windsor Life, Aberdeen and Fidelity are some of the biggest holders to reduce stakes in Rolls over the past few months.
Recent reports suggest this sense of disquiet has spread to the government, too, with the prime minister now said to be mulling the nationalisation of Rolls' stricken submarine division. An inquiry into the arm responsible for making the Trident nuclear vessels was sparked by fears that the engineer's travails have reached the point where a potential break-up is no longer out of the question. The growing influence of activist investor ValueAct has added to this speculation.
As the government owns a golden share, Rolls would require its consent before selling any significant part of its operation deemed to affect national security. There's also a ceiling of 15 per cent on foreign ownership, a safeguard introduced when Rolls was privatised in 1987. Other options reportedly being considered include a potential merger with BAE Systems (BA.), or taking a costly stake of more than 25 per cent.
Boss Warren East will hope his bid to remedy the group’s slow and bureaucratic decision-making can keep the sharks at bay. Plans to revamp the engineer's management structure has already led to the departures of head of aerospace Tony Wood and Lawrie Haynes, president of the land and sea division.
