* Krauss-Maffei Wegmann and Nexter plan merger
* Deal would create Europe's largest maker of ground arms
* German govt says merged firm would not avoid export rules
* No job cuts planned, as business complementary - source
(Adds details on deal structure, advisers)
By Gernot Heller and Victoria Bryan
BERLIN, July 2 Germany is to look into a
proposed merger of German and French tank and armoured vehicle
makers Krauss-Maffei Wegmann and Nexter to see if it threatens
the country's security interests, the economy ministry said.
The proposed deal between Nexter and KMW, announced on
Tuesday, would create Europe's biggest maker of tanks and other
ground armaments and offer the companies a chance to cut costs
at a time when defence spending is under pressure.
Against this backdrop, governments and industry agree on the
rationale for consolidation in the European defence industry,
but in practice governments often find deals unpalatable for
security or domestic political considerations.
A planned 2012 merger between Britain's BAE Systems
and Airbus - then called EADS - collapsed after
A source close to the Nexter/KMW plans said the fate of the
BAE/Airbus deal also caused a delay in the Nexter-KMW talks as
the companies feared a negative public reception for any new
As well as checking to see if the deal would be compatible
with security interests, Germany also said a merged company
would not be able to evade export restrictions designed to
control the sale of arms abroad.
Germany said last month it would adopt a more cautious
approach towards arms exports - which could affect KMW, which
gets 95 percent of its revenue from arms, but also for more
diverse defence companies such as Rheinmetall and
The proposed tie-up would create a combined company - for
which there is no name yet - with sales of almost 2 billion
euros ($2.7 billion) and a workforce of more than 6,000.
"The idea is to create a Franco-German champion for armoured
vehicles - something like an Airbus for ground forces,"
a source familiar with the deal said, adding the merger idea has
been contemplated for more than 5 years and actively worked on
for 18 months.
Under the proposed deal, the owners of state-controlled
Nexter and of family-controlled KMW would each take a 50 percent
stake in a combined company. Nexter makes the VBCI armoured
fighting vehicle and the Leclerc tank, and KMW makes the Leopard
2 BILLION EUROS
Nexter has earnings before interest and tax of around 107
million euros, while KMW has earnings before interest, tax,
depreciation and amortisation of around 100 million. If valued
at a similar multiple as peers - which trade at about nine times
their expected earnings - any deal may value the combined group
at roughly 2 billion euros.
"As the valuation will unlikely be exactly the same for both
companies the bigger group will likely receive a cash dividend,"
the source said.
Another person familiar with the deal said that the main
drivers of the deal were to share technology and develop new
products to expand the business.
"Of course, it's about synergies, but that does not
necessarily mean job cuts," the person said.
Analyst Michael Raab at brokerage Kepler Cheuvreux said in
a note to clients that ground forces and therefore companies
involved in land systems were among the most affected by
downsizing of armies.
"We have highlighted on several occasions that in times of
shrinking defence budgets consolidation is imperative," he said.
The proposed tie-up is exclusive, but only for a certain
period so that French influence could be diluted if German
automotive and defence components maker Rheinmetall, which
already works with KMW, wanted to take part in any new defence
project with a merged KMW-Nexter.
Rheinmetall, which said its own attempts to merge with KMW
had fallen on deaf ears, said its legal department was checking
the possible consequences of a KMW-Nexter tie-up to see what
effect it would have on joint projects.
A KMW spokesman said on Wednesday that any partnership with
Nexter would be exclusive for a limited time only and that they
would be open for further partners.
Steen Associates and Oppenhoff & Partners said they are
advising KMW on the deal.
Law firm Paul Hastings is advising Nexter and BDGS is
working for French state holding company APE, which controls
Nexter, two sources familiar with the deal said. Hastings and
BDGS declined to comment.
($1 = 0.7331 Euros)
(Additional reporting by Arno Schuetze, Jens Hack and Anneli
Palmen in Germany and marine Pennetier in France; Writing by
Alexandra Hudson; Editing by Stephen Brown and Jane Merriman)