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PARIS, July 1 (Reuters) - French arms maker Nexter and Germany's Krauss-Maffei Wegmann (KMW) have entered into exclusive talks to create a tie-up that would rank as Europe's largest maker of ground armaments such as tanks, a source in France's defence ministry said.
Potential post-merger European sales could amount to between 1.8 billion euros ($2.5 billion) and 2.0 billion annually, the source said, putting it ahead of BAE Systems, currently Europe's biggest defence contractor, and U.S.-based General Dynamics, in terms of European sales of ground armaments.
Both defence firms were due to sign an agreement on Tuesday specifying the broad outlines of such a joint venture, due not before 2015, the source told Reuters.
Nexter, maker of the VBCI armoured fighting vehicle and the Leclerc tank, is owned by the French state, while KMW, known for its Leopard tank, is family-owned.
The new structure, to be dubbed "Kant", would be 50 percent held by the French state and 50 percent by the Bode-Wegmann family, with a Franco-German co-presidency for its board, the source said.
"Today the concerned parties are signing a sort of engagement contract, a document that describes the big principles of how the new company would function," said the source, in the entourage of Defence Minister Jean-Yves Le Drian.
The source added that the signing would open an estimated nine-month discussion phase that would end in the creation of the joint-venture likely in the second quarter of 2015.
The Nexter-KMW tie-up comes amid increased competition in the defence sector and cuts in European countries' ground army budgets.
"To be an actor who counts on the European and world stage you have to have critical mass," said the source, who noted the joint venture would result in "financial gains for both (companies) and short-term sales gains without job losses." ($1 = 0.7331 Euros) (Reporting by Marine Pennetier; Writing by Alexandria Sage; Editing by Mark John and David Holmes)