LONDON British engineering company Rolls-Royce (RR.L) said on Friday it would fund the purchase of German carmaker Daimler's (DAIGn.DE) 50 percent stake of a jointly owned power systems company using cash and some borrowing.
Rolls-Royce said it had ample liquidity to take full ownership of the three-year-old joint venture Rolls-Royce Power Systems with Daimler's holding estimated to be worth 1.9 billion pounds ($3.18 billion).
The company said the transaction was expected to be completed within the next six months subject to the usual regulatory approvals.
Jefferies analyst Sandy Morris said the surprise move could add up to 5-6 percent to its shares when they open on Monday.
"The using of cash and borrowing facilities to pay for this clearly means that the related interest charge is modest and therefore the enhancement to Rolls-Royce's earnings is probably 5 or 6 percent and a useful little fillip," he said.
"Having full control over a business that has significant potential synergies with other part of Rolls-Royce gives you a free hand and that has got to be good," he added.
The 50-50 joint venture contains the assets of German engine maker Tognum, which Daimler and Rolls-Royce bought in 2011 for 3.4 billion euros.
Tognum makes diesel and gas turbine engines for tanks, armored vehicles, generators, cranes, trains and ships.
On the basis of long-term supply agreements, Daimler will continue to be an important supplier of heavy-duty and medium-duty diesel engines to RRPS going forward.
Daimler said it would use the cash it will receive for the sale for investments in the expansion of its core business.
Last month, Rolls-Royce warned that U.S. and European defense cuts mean that a decade of profit growth will come to an end this year, sending its shares sharply down and providing added incentive to refocus investor attention on the company's longer-term prospects. [ID:nL5N0LI11M]
"Rolls-Royce Power Systems has added scale and capability to our reciprocating engines business," said Chief Executive John Rishton in a statement.
"It has outstanding technology, operates in long-term growth markets and has proved a valuable addition to our Marine and Industrial Power Systems division," he added.
Rishton said the option, which is subject to a formal valuation process, was valued at 1.9 billion pounds on Rolls-Royce's balance sheet, ending December 31 2013.
($1 = 0.5981 British pounds)
(Additional Reporting by Harro ten Wold, Editing by Belinda Goldsmith and David Evans)