IT has been all sweetness and light recently for Rolls-Royce, with an excellent set of results at the start of the month and a Sunday Times award for chief executive Sir John Rose.

But into each life some rain must fall, and in this case the rain comes in some penetrating analysis from UBS, published on Friday. The UBS aerospace team has had a good think about an announcement last year from Pratt & Whitney, one of Rolls’s rivals, and drawn some rather disturbing conclusions.

Pratt said that it planned to start making parts for an engine made by General Electric, the other member of the big three that dominate the aero-engine market. Not a big deal on the face of it, but pretty seismic in the context of the industry. Engine-makers earn all their money from the sale of parts, and up to now they have stayed off each other’s turf.

UBS warns that Pratt’s move “has the potential to destabilise the market, seriously affect the existing business model, and lead to significant reductions in profit expectations for the major aero-engine companies”.

Investors have ignored the threat so far because they have considered it a far-off proposition or unlikely to succeed, but UBS reckons they are wrong. Its research shows that 60% of the aero-engines in service today are already off-patent, and that will rise to 90% by 2012.

While Rolls-Royce is likely to be one of the better-protected companies, the effect in UBS’s view is still serious enough for it to downgrade the company.

“We do not think this risk is being adequately factored into the Rolls-Royce share price,” it says.

Panmure Gordon

YOU have to admire the boldness of Tim Linacre, chief executive of stockbroker Panmure Gordon. For the best part of a year, the City has been awash with rumours about consolidation between mid-market stockbrokers.

But last week Linacre and Panmure caught the City on the hop by snapping up Think Equity, a San Francisco-based investment bank, for $62.3m (£31.7m) and a similar amount in deferred payments.

Panmure has seen a relentless squeeze on commissions, partly because of regulatory changes. One alternative would have been to diversify by buying a private-client fund manager — but this is an area where Panmure has little expertise.

Linacre says the US deal will be transformational: Panmure gets access to American investors and is aiming to cash in on a growing desire for US companies to list on the UK stock market.

Still, some believe the deal is a big gamble — while Panmure has some experience of the US, cracking America remains a tough task. The big challenge will be making Think Equity profitable — though its revenues jumped 44% last year and it made a $2.8m operating profit, a hefty $13.7m paid in bonuses drove it to a loss. Rivals are whispering that Linacre is betting the bank. That looks unfair, but buying Think Equity is an ambitious move that could either transform Panmure or be an expensive mistake.

grant.ringshaw@sunday-times.co.uk

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