Rolls-Royce Falls Back as Golden Share Reality Damps Merger Talk

(Bloomberg) -- Rolls-Royce Holdings Plc shares slumped as much as 12%, reversing some of Friday’s gains, as analysts talked down the possibility of a takeover bid for the aircraft-engine maker.

Market speculation about a potential acquisition sparked a 19% jump in the shares late Friday, even as the company declined to comment. Those gains started fading Monday as some analysts noted the U.K. government could block the deal with its “golden share,” which gives it veto rights.

Naysayers discount any prospect of a foreign company buying Rolls-Royce. And they argue a deal between Rolls-Royce and any other suitor would attract close scrutiny from antitrust authorities on national security grounds, noting the firm’s nuclear-power and submarine-propulsion businesses.

“It’s very hard to see how Rolls-Royce can strike any sort of deal given the government’s golden share,” said AJ Bell investment director Russ Mould.

What’s more, in light of energy security issues, ceding control of Rolls-Royce’s expertise in modular nuclear reactors would surely be seen as an own goal, and Prime Minister Boris Johnson looks keen to push nuclear as hard as he can, Mould said.

Rolls-Royce is not new to M&A chatter. The company was a subject of takeover speculation in 2020 after its right issue, and in 2015 following a series of profit warnings. The stock is down about 77% from its peak in 2014.

Robert Stallard at Vertical Research Partners pointed to “the increasingly protectionist stance of the U.K. Government when it comes to foreign acquisitions,” for example the ongoing probes of Ultra Electronics Holdings Plc and Meggitt Plc deals. 

But some are talking up partnership with British firms. Miguel Vaz, partner and head of the merger-arbitrage desk at Fieldfisher, said a tie-up with a strategic partner such as BAE Systems could bring long-term stability and additional guarantees from a national security perspective, though it will likely require a National Security Act review.

Richard Wray, director of external communications at Rolls-Royce, said Friday by email the company does not comment on rumors and speculation.

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