Shares on the FTSE 100 blue-chip index climbed 2.2% following the announcement before slightly falling back.
The decision forms part of Rolls-Royce’s plans to streamline its business, as demand for diesel falls.
Speculation that Rolls-Royce might sell the business began three months ago when it said it was “reviewing strategic options” for L’Orange after a string of profit warnings.
The deal, expected to close by the end of the second quarter of 2018, marks Roll-Royce’s biggest divestment since chief executive Warren East took over in 2015.
East said that shedding L’Orange — a subsidiary of Rolls-Royce’s power system’s arm — would help “improve the resilience” of the balance sheet and shore up extra capital “to pursue opportunities that will drive greater returns”.
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This transaction builds on the actions we have taken over the last two years to simplify our business.
The divestiture of L’Orange enables Rolls-Royce power systems to focus on other long-term, high growth opportunities and our company to allocate our capital to core technologies and businesses that drive greater returns for the group.
CEO of Rolls-Royce power systems, Andreas Schell, said that L’Orange would continue to supply Rolls-Royce under a 15-year agreement:
Rolls-Royce Power Systems will remain a key customer of Woodward L’Orange.
Rolls-Royce, which makes engines for the aircraft, ships, trains and heavy-duty trucks, also plans to shed its loss-making commercial marine business after carrying out a review of the unit, it was reported by Reuters.
— Rolls-Royce Press (@RollsRoycePress) April 9, 2018
L’Orange has approximately 1,000 employees in Germany, the US and China, with the majority based at the company headquarters Stuttgart.