PARIS/FRANKFURT French arms maker Nexter and Germany's Krauss-Maffei Wegmann (KMW) have entered exclusive talks to create a tie-up that would rank as Europe's largest maker of ground armaments such as tanks, to better cope with military budget cuts.
The defense firms signed an agreement specifying the broad outlines of such a joint venture, the French government said in a statement.
The two companies said the planned merger, which would see their owners each take a 50 percent stake in the combined group, would allow them to preserve jobs in the European Union.
"The two companies' product portfolios and their regional presence in the world market complement each other almost without any overlap," they said in a joint statement.
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 owned by German family holding Wegmann GmbH & Co.
"The rise in international competition in this industry and constraints weighing on European armaments budgets call for the formation of a competitive group benefiting from an enlarged range of products, skills and complementary expertise," France's budget, economy and defense ministers said in a separate statement.
Earlier in the day, a source told Reuters that merger talks were underway.
Potential post-merger European sales would be close to 2 billion euros ($2.7 billion), the two defense contractors said.
That would put it ahead of Britain's BAE Systems (BAES.L), currently Europe's biggest defense contractor, and U.S.-based General Dynamics (GD.N), in terms of European sales of ground armaments.
The order backlog of the combined group would be about 6.5 billion euros and its workforce would be more than 6,000, according to the statement.
The companies said due-diligence assessments of both merger parties would be carried out and the tie-up was likely to take effect in the second quarter of 2015.
(Reporting by Marine Pennetier and Ludwig Burger; Writing by Alexandria Sage; Editing by David Holmes and Keiron Henderson)