LONDON (Reuters) - Britain would consider nationalising Rolls-Royce's business which makes the power systems used in the country's nuclear submarines, if the company's difficulties worsen, the Financial Times reported.
The government could also decide to merge some or all of Rolls-Royce's businesses with Britain's biggest defence company BAE Systems, the FT said. (http://on.ft.com/1IO0UsN)
Rolls-Royce has been subject to takeover speculation after its share price fell 30 percent over the last year following a series of profit warnings related to a slow-down in its marine engine division and problems in the part of its aero-engine business which services older planes.
The British government holds a "golden share" in Rolls-Royce which means certain deals need its consent, while foreign ownership of Rolls-Royce is limited to 15 percent as part of rules drawn up when it was privatised in 1987.
But the contingency plans reported by the FT suggested the government is uneasy about the situation at Rolls-Royce which plays an important role in the country's defence programme.
The FT said officials at Prime Minister David Cameron's office were concerned that Rolls-Royce's management had no substantial experience of defending itself in the event of a hostile takeover bid.
Rolls-Royce said on Monday it was business as usual as far as its relationship with the government was concerned.
"We are in contact with the government as a matter of routine and regularly keep them updated on our performance and progress," a spokesman said.
A spokeswoman for the prime minister said she did not want to speculate on the company's future, but noted the FTSE 100 company's importance to Britain.
"Rolls Royce is a major contributor to our economy, it is an important supplier of equipment to the government and we will continue to work closely with them," she said.
BAE declined to comment on the FT story, saying it did not comment on rumour or speculation.
POTENTIAL BID TARGET
Rolls-Royce, alongside BAE Systems, is a major contractor on a plan to replace Britain's ageing fleet of four submarines which carry the country's Trident nuclear deterrent. Known as the Trident Successor project, it has an estimated cost of 31 billion pounds, making it one of the government's largest investments.
In the event that a potential bidder presented a plan to improve the performance of Rolls-Royce, investors could pressurise the government over the foreign ownership rules, said the FT.
The company, the second-largest maker of aero-engines globally, is seen as a potential acquisition target for U.S. aero-engine maker Pratt & Witney and Germany's Siemens.
Standard Life's head of UK equities told BBC Radio on Monday that the UK government plan was "interesting" but it did not mean the situation at Rolls-Royce had changed.
"I don't think this is a signal that Rolls-Royce is in trouble. Rolls-Royce will recover over time. It's a good company with good long term prospects but going through difficult short term trading," he said.
Jefferies analyst Sandy Morris said the government's focus on Trident Successor was not surprising.
"I think the government being totally on top of Trident, and how they're going to manage it and the supply chain is only sensible," he said.
Rolls-Royce Chief Executive Warren East, at the helm since July, ruled out any plans to sell big chunks of the business in November. This followed pressure from activist investor ValueAct for the company to divest its marine engine business and focus on its aero-engine business.
Shares in Rolls-Royce were flat at 552 pence by 1205 GMT, paring earlier gains of 1.6 percent when the stock was buoyed by the idea that a takeover situation could emerge.
(Reporting by Sarah Young in London and Ankush Sharma in Bangalore; additional reporting by Kylie MacLellan; Editing by Alan Crosby and Jane Merriman)