November 27, 2021

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Rolls-Royce and Babcock sell shares in AirTanker to boost balance sheets

Aerospace & Defence updates

Rolls-Royce and Babcock International have agreed to sell their shares in AirTanker Holdings, the company that owns the RAF’s fleet of refuelling planes, for £315m as the manufacturers seek to repair their balance sheets.

Private equity group Equitix Investment Management will pay £189m for Rolls-Royce’s 23.1 per cent stake in AirTanker and another £126m for Babcock’s 15.4 per cent share.

The two manufacturers have been looking to raise funds through disposals and said the proceeds would be used to reduce net debt levels. 

For Babcock, it is the third disposal in recent months as part of a sweeping restructuring programme under new chief executive David Lockwood designed to streamline Britain’s second-biggest defence contractor.

The deal, if completed, “ensures we will meet our target of generating at least £400m of disposal proceeds this financial year”, said Lockwood. 

The company in July revealed an operating loss of £1.64bn from £75.6m a year earlier for the full year to the end of March.

The steep loss was largely due to the previously flagged one-off, non-cash impairments, which were the result of a review of its contract and balance sheet profitability instigated by Lockwood. 

Rolls-Royce, whose balance sheet has been battered by the coronavirus pandemic, wants to raise £2bn from disposals.

The FTSE 100 company, which is paid according to the hours flown by aircraft that are fitted with its engines, took a big financial hit from the grounding of flights during the pandemic.

It revealed in August it was in exclusive talks with a consortium led by Bain Capital to sell its Spanish engine business ITP Aero. Analysts have estimated that disposal could raise about €1.6bn.

The Financial Times reported earlier this month that Rolls-Royce’s biggest investor, Causeway Capital Management, had called on incoming chair Anita Frew, to refresh the board as it emerges from the crisis. 

Tom Bell, president of Rolls-Royce Defence, said the sale was “another important step towards achieving our group target to generate at least £2bn from disposals, as announced last year, to help rebuild our group balance sheet in support of our medium-term ambition to return to an investment grade credit profile”.

Shares in Babcock rose 3 per cent to 351.69p, while Rolls-Royce shares were trading up 1 per cent to 110.10p by early afternoon in London on Monday.

The rest of AirTanker is still owned by Thales and Airbus. Both Babcock and Rolls-Royce will retain their respective stakes in AirTanker Services, which operates the 14 RAF Voyager aircraft.

The sales are conditional on regulatory approvals, and will require consent from the Ministry of Defence and the US Department of State.