Rolling in the Deep: Rolls Royce plans to raise £2.5bn in equity finance

October 30, 2020

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3 min read

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What's going on here?

Rolls Royce has recently been in communication with sovereign wealth funds to raise £2.5bn.

What does this mean?

This decision follows the fall of Rolls-Royce’s shares by 81% to a 16-year low at the end of September. The UK auto-engine group has seen its balance sheet and share price fall as a result of the pandemic. Its plan is to raise £2.5bn in an effort to mitigate the negative repercussions of the pandemic.

As part of this plan, the company was initially in talks with multiple foreign investment funds including funds from Singapore and Kuwait. These efforts were quickly curbed by British intervention. This raises speculations that the government will provide Rolls-Royce with financial aid.

What's the big picture effect?

This story is a good illustration of the long-term effect of the Coronavirus pandemic on the aviation industry. A significant part of Rolls-Royce’s business focuses on aeroplane engines. It particularly specialises in long-haul engines, which, in light of travel restrictions worldwide, puts its business at a precarious risk. FT analysts report that the long-haul flight market is likely to recover at a much slower rate than short-haul and regional travel. This comes as a further hit with the threat of increased infection rates and a second wave looming over Europe.

Rolls-Royce is a company of particular importance to the UK market. It is a key defence contractor and a prominent employer. Whitehall has a particular interest in maintaining British control over the company because of its unique ‘golden share’ in Rolls-Royce. This means that the UK Government has a right to veto specific strategic decisions. This leaves room for wondering whether a decision to provide state aid for the company will follow suit. If the Government were to intervene, it would go entirely against its past decisions regarding airlines struggling because of the pandemic. Some arguments against state aid would be that uncertainty about when travel will resume makes it difficult to determine the effectiveness of Government aid. The gradual deterioration of the airline sector may also mean that some airlines would be in a better financial situation following a grant than before the pandemic.

Many similarities can be drawn between Rolls-Royce current equity financing and Barclays’ capital raising exercise during the 2008 economic crisis. Much like Rolls-Royce’s initial plan, the bank received a combined £11.8bn from foreign investors during the economic crisis. The negative impact of Barclays’ foreign investing was likely one of Rolls-Royce’s main deterrents from the plan. Additionally, the deal did not succeed in the long run. The investors are no longer shareholders, after investors sold the shares acquired in the bank a mere year after purchasing them. This caused Barclays’ shares to further deteriorate in the long run despite having been on to a stronger start than fellow banks affected by the crisis. The bank’s shares have more than halved since the 2010 peak, according to the FT. Foreign investing proved a very risky business that almost cost Barclays its business. In a trial spanning a decade, the UK Serious Fraud Office acquitted three former executives accused of conspiracy of fraud. The repercussions on Barclays may serve as a warning to Rolls-Royce.

On the whole, Rolls-Royce’s shift away from foreign investing aims to preserve the privileged place it has amongst British businesses. The possibility of state intervention is appealing to the UK auto-engine group as it seeks to preserve its performance in the long term.

Report written by Andreea Dicu

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