FRANKFURT: Several German defence groups are in talks that could lead to a consolidation of the industry as it struggles with overcapacity and steep cuts in European defence spending.
Steel group ThyssenKrupp has started approaching potential buyers for its submarine unit HDW including French peer DCNS, sources familiar with the situation told Reuters.
And part-German airplane and defence group Airbus is in the midst of a reorganisation that will see several units and stakes divested that are currently being defined as peripheral to the business, people familiar with the group said.
Both developments come after news that Krauss-Maffei Wegmann (KMW) is discussing a merger with French rival Nexter, and that peer Rheinmetall has also expressed interest in the German tank maker. The shakeup of the industry comes at a time when conflicts in Ukraine, Iraq and Syria would suggest that demand for weapons is on the rise.
However, Germany's strict export guidelines on arms means its makers of weapons, tanks and submarines do not necessarily benefit. Cuts in European governments' military spending have left the sector struggling to make money and in 2012 prompted EADS (later renamed Airbus) and Britain's BAE Systems to work on a merger, which was then thwarted by German opposition.
NATO has recently renewed its call for increased defence spending by member nations and pointed to its long-standing target of 2 percent of gross domestic product (GDP).
But Germany's defence spending has fallen to 1.3 percent of GDP and it has no plans to increase that. Instead, it is focused on balancing the budget in 2015 for the first time since 1969.
German policymakers have lately called for renewed efforts to consolidate the industry, with some saying technology and jobs should be kept in the country.
Economy Minister Sigmar Gabriel said consolidation and "Europeanisation" was needed, while introducing a more restrictive policy on arms exports which experts say could hurt business for some firms in the sector and put some of the 80,000 German defence jobs at risk.
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Gabriel is reportedly sceptical about plans for KMW to merge with France's Nexter and believes a merger with Germany's Rheinmetall would make more sense. KMW and Rheinmetall supply Puma branded armoured fighting vehicles to the country's armed forces.
However, talks between KMW and Nexter remain exclusive, and for now they only allow for a potential follow-up transaction with Rheinmetall once the deal is closed in the first quarter, sources familiar with the matter said.
The political lobbying is putting off potential merger partners for Thyssen's HDW unit, who are unsure whether Germany would allow the trophy defence asset to go to a foreign firm.
"DCNS would only make an offer if it is understood that it would be admissible," a French source familiar with situation said. According to a German newspaper report, Thyssen has also discussed a deal for HDW with Rheinmetall.
But sector sources said that as Rheinmetall sold its last marine assets a decade ago, they do not expect the Duesseldorf-based group to be a good fit. Separately, Airbus is close to announcing divestments that are expected to reshape the group's defence activities, notably in Germany, which could draw criticism from local politicians.
According to sources familiar with that situation, the European group is considering a sale of its stakes in Atlas Elektronik, in ESG Group, as well as some activities of its optronics, command & control and electronics businesses. An announcement may come by the end of the month, the sources said.
Airbus CEO Tom Enders has said that he does not want to abandon the defence business but that a shake-up is needed to provide greater discipline and cohesion to disparate defence activities.
The group has, however, dropped a former long-term goal of balancing defence and commercial revenue after the failure of merger talks with BAE. The companies mentioned in this story declined to comment.
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