Rolls-Royce Jumps on Profit Upgrade and Bribery Settlement

Rolls-Royce Plc

By Sarah Young and Kirstin Ridley

LONDON, Jan 17 (Reuters) – Shares in Rolls-Royce jumped as much as 7 percent on Tuesday after the British maker of engines for planes and ships settled a long-running bribery probe and said 2016 profit would beat expectations.

The conclusion to the bribery investigations by British, U.S. and Brazilian authorities helped remove a cloud hanging over one of Britain’s biggest corporate names since 2013.

The settlement, and the forecast for better than expected profit, comes as a boost to CEO Warren East who, since joining in mid-2015, has led a drive to slash costs and restructure the group following a series of profit warnings.

Rolls apologised for its conduct in the bribery scandal after announcing on Monday that it would pay 671 million pounds ($813 million) in total to settle the investigations.

News of the bigger-than-expected total settlement was “negative but benign” as Rolls could spread payments out over five years, said Jefferies analyst Sandy Morris.

“This is by no means a great moment in Rolls-Royce’s history but in terms of a healing process, getting the SFO (Britain’s Serious Fraud Office) settled and having trading, particularly on cash flow improving, well maybe, just maybe, Rolls is on the mend,” Morris said.

A British court said on Tuesday that it would approve the agreement between Britain’s SFO and Rolls in a written statement at 1600 GMT. Rolls said it would pay 497 million pounds to the SFO plus interest and a payment in respect of costs.

The court heard that the case against Rolls-Royce involved bribery of senior foreign officials and senior staff, stretching across the globe and its businesses from 1989-2013, with over 100 key employees and 33 million documents examined, in what the SFO said was the biggest investigation in its history.

The conduct, lawyers said, was carefully planned and led to large contracts earning as much as 250 million pounds. Countries including Thailand, Indonesia, India, Russia, Nigeria, China and Malaysia were named as places where there was either conspiracy to corrupt or failure to prevent bribery.

The company’s lawyer David Perry told the court that the company had undergone a “fundamental change” since the investigations began, overhauling systems, training, governance and ethics strategies.

“Rolls-Royce apologises unreservedly for the conduct that has been uncovered,” he said.

SHARES CLIMB

Shares in Rolls were up 4.4 percent to 698 pence at 1424 GMT, hitting their highest level for two months.

Rolls said on Monday it had finished the year strongly, with profit and cash flow ahead of expectations.

The company is due to report 2016 results on Feb. 14 with the consensus forecast for annual pretax profit predicted to halve from the year before, to 686 million pounds.

East has targeted savings of up to 200 million pounds a year from this year – by cutting managerial jobs – while a positive market backdrop for aircraft engines and a helpful post-Brexit slump in the pound could all have boosted profits.

“I think East’s doing a really good job. He’s doing all the right things,” said Agency Partners analyst Nick Cunningham.

East himself, however, acknowledges that the company still faces a huge challenge as it tries to execute its restructuring at the same time as it almost doubles output of wide-body plane engines by 2019 to meet orders, while avoiding cost overruns and technical problems.

Over the last 12 months, shares in Rolls have outperformed Britain’s blue-chip index, rising 33 percent, but have declined 8 percent since November when it set out what new accounting procedures would mean for its profits.

VICTORY FOR SFO

Rolls, which also makes engines for military jets, ships and nuclear-powered submarines, said the settlements agreed with the three authorities would involve the group paying about 293 million pounds in the first year.

The SFO’s deferred prosecution agreement (DPA) with Rolls is a notable victory for the agency, representing the largest penalty it has issued. Set up to deal with the most serious and complex fraud cases, the SFO has had a chequered record in securing convictions over its 28-year history.

“In scale, it (the DPA) rivals the sort of penalty we are used to seeing extracted by the U.S. authorities, so will be viewed as a success for the SFO in establishing itself as a global anti-corruption agency to be feared,” Neil Swift, Partner at law firm Peters and Peters, said.

The DPA covers the company but means individuals involved can still be prosecuted by the authorities and the written judgement could reveal whether former Rolls-Royce executives would be prosecuted. ($1 = 0.8254 pounds) (Reporting by Sarah Young; Editing by Kate Holton and Susan Fenton)

(c) Copyright Thomson Reuters 2017.