ALEX BRUMMER: Lift-off for Rolls-Royce strategy

Rolls-Royce was hugely endangered by the pandemic.Its dependence on the Trent engine for wide-bodied jets, and the need for flying hours to maintain revenues, posed an existential threat to the future of Britain’s premier engineer. 

Direct Covid assistance was provided to the aerospace sector in France, Germany and the US, but chief executive Warren East had to deal with a far more grudging approach in Whitehall. 

Its survival was assisted by a £2billion loan guarantee from the ECGD, which brought lenders such as JPMorgan to the table. 

The Ministry of Defence came through with some key new contracts and finally there was recognition that with its research on small modular reactors (SMR), the company was onto a greener technology which could help speed the UK’s transition to carbon neutral. 

Never before has the case for SMRs seemed more acute than during this autumn’s natural gas crisis when energy security has been undermined by Moscow and the failure of scheduled liquid natural gas deliveries to arrive at the Isle of Grain in Kent. 

There are signs that the long nightmare could be lifting for East, who has made good use of the crisis to streamline.Rolls has moved a long way towards its target of £2billion of disposals with the sale of its Spanish unit ITP Aero. As is often the case when companies are in a hole, the buyer of last resort is private equity, with Bain Capital stepping up with a £1.5billion bid. 

As encouraging, the often denigrated ‘special relationship’ also has come to the rescue with the US Air Force ordering up to £1.9billion of engines for its next generation B52 bomber.What is all the more remarkable is that Rolls replaces the incumbent supplier, America’s Pratt & Whitney, which is a vote of confidence in UK aerospace skills. 

It underlines why it is so foolish for Britain to have allowed so much of its second-tier aerospace, such as Cobham, to fall into the hands of financially driven buyers rather than those motivated by R&D. 

It is terrific that the Government has seen sense and put some £215m of funding behind the Rolls-Royce SMR project, which was mouldering on the drawing board. 

The vulnerability of the UK to the volatility of the global energy market has been horribly exposed this month.Boris Johnson, who has a liking for big infrastructure, should up the Government’s game and take inspiration from Churchill, invoke the Bletchley Park spirit and go all out for SMRs. 

Nukes won’t fill up our cars tomorrow.But they could ensure that, when we do go electric, unwanted power cuts can be avoided.

Pound cake 

By the past standards of the Financial Reporting Council, the speed with which it has acted to mete out punishment to Grant Thornton over its audit of Patisserie Valerie is greased lightning.The black hole in the accounts of the company was first revealed in June 2019, and the auditor and the partner concerned are already being hung out to dry. 

A fine of £4m (reduced to £2.3m for good behaviour) has been issued and Grant Thornton put under special measures. 

As for the offending partner, David Newstead, there is a fine of £150,000 (also reduced) and a three-year ban from signing audit reports.Given that the average partner payout at Grant Thornton in 2019, the year of the offence, was £566,000 there is not going to be inordinate suffering. 

The probe does demonstrate that the FRC has pulled up its socks.It could be much more effective if it has the statutory powers promised for the much delayed replacement Audit, Reporting and Governance Authority proposed by John Kingman.

Exit tax 

There are many reasons to oppose private equity takeovers of UK firms. 

One often ignored is the way in which domicile is moved from the UK to offshore tax havens. 

Clayton, Dubilier & Rice (CD&R), the favourite to take over Morrisons, would shift to the Cayman Islands if it wins the prize. 

It is not the first time that an entity headed by Terry Leahy has adopted such tactics.When B&M was first brought to the stock market by CD&R in 2014, its tax affairs were also buried in the obscurity of the Caymans. Founders the Arora brothers located their interests in Luxembourg. 

Yet private equity wonders why its involvement in UK enterprise produces such unfriendly responses.