Rolls-Royce’s submarine business that makes the power systems that drive Britain’s nuclear deterrent could be nationalised, according to the Financial Times.
The British government still holds a ‘golden share’ in Rolls-Royce which means certain deals need its consent, while foreign ownership of Rolls-Royce is limited to 15 per cent following its privatisation in 1987.
However, shares in the company have fallen by 30 per cent 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 FT reports that 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 and that pressure from investors could result in a relaxation of the foreign share ownership rules.
The government is also concerned about the implications on the UK’s defence infrastructure if the company continues to underperform.
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 £31bn, making it one of the government's largest investments.
Internal sources have suggested that the government could also merge some or all of Rolls-Royce's businesses with BAE Systems.
BAE declined to comment on the FT story, saying it did not comment on rumour or speculation.
"We are in contact with the government as a matter of routine and regularly keep them updated on our performance and progress," said a Rolls-Royce spokesman.
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.
Last month, Rolls-Royce CEO Warren East announced measures to save the company between £150m and £200m annually.
This follows 3,600 job cuts and further planned axing of some of its managerial staff.
A recent government review of the UK’s defence spending has revealed that the anticipated costs of replacing Trident could rise to £40bn from earlier projections of £25bn.
Other bodies such as the Scottish National Party have said this figure is an understatement and that the total cost would amount to £167bn.