Rolls-Royce Forced to Drop Bergen Engines Deal Over Russia Risk

(Bloomberg) -- Norway blocked the sale of Rolls-Royce Holdings Plc's Bergen Engines arm in a setback for the U.K. firm's restructuring plans after ruling that the deal with Russia's biggest train maker posed security risks.

The Justice and Public Security Ministry said Tuesday it wasn't comfortable with the 150 million-euro ($178 million) sale of Bergen, which is based in the Norwegian city of the same name, to TMH Group. The rolling-stock supplier is based in Moscow and co-owned by Russian billionaire Iskandar Makhmudov.

Bergen cannot be sold to a company “controlled from a country with which we do not have security cooperation,” Justice Minister Monica Maeland said in a statement. The firm supplies engines and generators to the military in Norway and allies including the U.S., making its technology strategically significant to Russia, she said. It's home city also hosts Norway's main naval base.

The disposal of Bergen was one of the building blocks of Rolls-Royce's revamp plan, as the firm turns to asset sales to raise cash after the Covid crisis hit demand for the wide-body jets that use its engines, hurting both new orders and maintenance revenue. Rolls said in a statement it was awaiting formal instruction from Norway to halt the transaction, and would be seeking Oslo's assistance in finding another option for a business it doesn't intend to keep.

Shares of Rolls-Royce, which said it remains committed to raising at least 2 billion pounds from disposals by early 2022, fell as much as 5.3% and were trading 3.8% lower as of 12:21 p.m. in London.

When Norway first raised concerns over the Bergen deal earlier this month, Rolls-Royce said it had “alerted the government in the proper way before announcing the sale.” Maeland said Norway took time over examining national-security implications as there were no imminent military deliveries at stake.

Bergen, which provides engines to maritime and power-sector customers, has been part of the U.K. company since 1999. The planned sale was to include a medium-speed engine factory, service workshop and foundry in Norway, engine and power-plant design capabilities, and a global service network.

The loss of cash from the deal is “enough to have nuisance value, said Sandy Morris, an analyst at Jefferies, adding that it's not clear whether Rolls-Royce has received any other purchase interest. “If Bergen is important to national security, the problem is now as much Norway's as Rolls-Royce's.”