BMW takes stake in Rolls-Royce up to 10%

BMW, THE German car maker, realigned its relationship with Rolls-Royce yesterday, boosting its stake in the aerospace and marine engines group to 10 per cent from 2 per cent, becoming its single largest industrial shareholder.

BMW, THE German car maker, realigned its relationship with Rolls-Royce yesterday, boosting its stake in the aerospace and marine engines group to 10 per cent from 2 per cent, becoming its single largest industrial shareholder.

Part of the increase came, in exchange for BMW's interest in the two companies' loss-making joint venture, BMW Rolls-Royce Aero Engines, full control of which will be taken by Rolls-Royce. The news fuelled a 30.25p gain in Rolls-Royce's share price to 221.25p yesterday as BMW waded into the stock market, committed to spending about £200m to beef up its holding.

The German carmaker made clear there was no intention of making a general offer for the company: foreign shareholders are limited to a maximum 15 per cent holding in Rolls-Royce.

Joachim Milberg, BMW chairman, said: "It is our intention to extend our strategic interest in the gas turbine business through a significant stake in Rolls-Royce ... We are thus a stakeholder in a mature company, which translates into a considerable minimisation of risk for us."

Analysts said BMW's move underlined its faith in prospects for the core Rolls-Royce engines business, although they noted its holding was now more liquid. BMW's expenditure on shares is roughly balanced by the joint-venture's debt and future losses fully assumed by Rolls-Royce.

"From Rolls-Royce's perspective, it does not change anything strategically," one analyst said: "There had been a suspicion that BMW wanted to reduce its stake in the joint venture, but they are swapping that for a bigger, direct stake. Obviously that is an indication that they value the investment." BMW had held a 2 per cent stake in Rolls-Royce since 1990, when the pair formed BMW Rolls-Royce Aero Engines to develop the BR700 series for the corporate and regional airline sector. Last year, the unit recorded a pre-tax loss of 460m marks on sales of 791m marks. It is seen moving into the black early in the next decade.

BMW will assume 33.3 million new Rolls-Royce shares in exchange for its 50.5 per cent in the joint venture, valued at £64m at last Friday's close. BMW said it would buy a further 90 million Rolls-Royce shares in the open market. The Rolls-Royce balance sheet will acquire £50m in net assets, £190m in goodwill and £170m in net debt, including the the joint venture's net obligations.

Rolls-Royce said the aero-engine unit would be renamed Rolls-Royce GmbH and run as a German subsidiary with headquarters in Dahlewitz, near Berlin. The deal would yield cost savings of £20m a year and be earnings-neutral for Rolls-Royce, after the amortisation of goodwill. Including yesterday's deal, Rolls-Royce had invested £500m in BMW Rolls-Royce, compared with BMW's 1.7bn marks.

Last month, Roll-Royce launched an agreed £576m bid for Vickers, the marine and defence engineering group. Last year, Vickers sold the Rolls-Royce automotive business to German carmaker Volkswagen for £470m, but the Rolls-Royce marque will pass to BMW from 2002. Vickers bought Rolls-Royce's cars division in 1980.

BMW shares yesterday rose 0.21 euros to close at 29 euros.