Stephen Foley: Rolls-Royce shows delicate touch

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The Independent Online

Outlook The tightening emissions standards and demands for fuel efficiency that have been part of the landscape for the makers of cars and aeroplanes for many years are becoming a reality in the world of shipping, too, which is why Rolls-Royce's marine engine business has been growing at an annual rate of 21 per cent. Its €1.4bn pursuit of the German engine maker Tognum, via a joint venture with Daimler announced yesterday, is aimed at more quickly capturing the demand for these increasingly complex ship powertrain systems.

It is moving with welcome delicacy, and with a bit of skill it ought to be able to avoid paying more than the €24 per share pitched yesterday – despite the fact that opportunists bid Tognum shares higher than that in the hours after the proposal was announced. Tognum's management, which will present the company's latest results today, has so far demurred to recommend the €24 figure, but it is a generous 30 per cent higher than the prevailing share price before news leaked at the weekend, and gets Tognum back to the price at which it floated in Germany in 2007.

One Tognum shareholder was grousing yesterday that the US giant Caterpillar paid a multiple of 10 times Ebitda when it bought Deutz Power Systems last year, and Tognum should fetch the same at least. With Rolls-Royce's contribution of €1.4bn and a valuation on Tognum of €3.2bn in total, the deal, if it goes through, will be a multiple of 9.

But Daimler already owns 29 per cent of Tognum and, showing no sign of wanting to take full control, has chosen Rolls-Royce as its preferred partner. There is therefore no prospect of an auction of Tognum, and no other company would be able to combine Tognum with as complimentary a marine business as Rolls-Royce plans to do with its Bergen subsidiary, which will be folded into the joint venture.

Rolls-Royce and Daimler have set a low bar for the tender offer, of only 50 per cent acceptances, and are therefore more than halfway there. Executives signalled they are happy to wait for Tognum shareholders to come round. They are playing a long strategic game. There is no hurry.