Rolls-Royce targets German engine maker in $4.1bn takeover

ROLLS-Royce is gearing up to make its biggest acquisition after entering negotiations to buy a German engine maker for $4.1 billion.

08-03-2011

ROLLS-Royce is gearing up to make its biggest acquisition after entering negotiations to buy a German engine maker for $4.1 billion.

Rolls and Daimler have joined to look at buying Tognum in a joint deal that would significantly strengthen the British company's marine business.

Tognum, which is 28.4 per cent- owned by Daimler, makes diesel powerplants and propulsion systems for the shipping industry.

The German company's shares soared by 23 per cent to €22.77 ($31.40) on Monday as Rolls and Daimler made a joint statement expressing their interest in acquiring it.

"Constructive discussions with the supervisory board and management board of Tognum are being held," Rolls and Daimler said. "No final decisions on a possible acquisition have been made."

Tognum said that it would evaluate any proposal that may be received. The deal would be a huge step for Rolls, which traditionally has relied on organic growth to build its business.

In its most recent big acquisition, it bought Vickers for $1.44bn in 1999. Last year it purchased the Norwegian oil services company Odim for $215 million.

Even a joint bid for Tognum represents a significant investment for Rolls, although the company has more than $1.5bn of cash on its books.

Rolls inherited its marine business from Vickers and it has grown rapidly to become the second-largest part of the company, after commercial aircraft engines.

The marine division generated revenues of $4.2bn last year and profits of $531m, about one third of Rolls' total.

The company specialises in providing sophisticated natural gas engines to shipping fleets, particularly in the oil and gas sector.

Its engine systems are used in more than 30,000 vessels worldwide, including the Royal Navy's fleet. It also builds nuclear power plants for the Navy's submarines.

By contrast, a large part of Tognum's business is making diesel engines. These are less sophisticated than natural gas engines but are fitted in far more ships.

Tognum also makes power units for the oil and gas industry, which is likely to be merged with Rolls's operations should the deal go through.

Reports from Germany suggested that Daimler and Rolls were offering $33 a share, a 30 per cent premium to Friday's closing price.

However, the management and employees of Tognum, who own 10 per cent of the company, are said to be pushing for more.

Daimler sold Tognum to EQT, a Swedish private equity group, in 2005 for $2.2bn. It bought back a stake in 2008 when the company was floated. Tognum had revenues of $3.4bn in 2009.

Ross Cowley, of Credit Suisse, said that the deal would give Rolls-Royce "critical mass" in its marine business.