July 2 (Bloomberg) -- Krauss-Maffei Wegmann GmbH, the German maker of the Leopard 2 battle tank, and French rival Nexter Systems SA plan to combine, highlighting the pressure facing Europe’s defense industry to gain scale and cut costs.
The parent companies will each own 50 percent of a holding company with revenue of almost 2 billion euros ($2.74 billion) and more than 6,000 employees, they said yesterday, after signing an agreement in Paris. The companies will next perform due diligence, and the merger is set for completion in early 2015, pending regulatory approval, they said.
The announcement comes less than two years after Airbus Group NV sought unsuccessfully to combine with BAE Systems Plc to enhance its defense capabilities, which have come under strain as governments cut budgets. Krauss-Maffei and Nexter said their products have little overlap, and that merging will help them compete internationally and preserve jobs and know-how in Europe.
“KMW, Nexter and their owners view this step as decisive for the consolidation of the defense technology industry in Europe,” the companies said in a joint statement. “The alliance of KMW and Nexter creates a group with the momentum and innovative force required to succeed and prosper in international competition.”
A merger “makes sense” because it would help preserve the capabilities of Europe’s defense industry, the German Economic Ministry said in an e-mail. The country can block the deal if it determines that security interests would be jeopardized, the ministry said.
Krauss-Maffei, which traces its roots to two German makers of railway carriages dating back more than 170 years, counts the Leopard 2 as well as the lighter infantry fighting vehicle Puma among its products.
Nexter, owned wholly by the French state through Giat Industries SA, makes military vehicles including the Leclerc tank and armored troop carrier Titus as well as armaments such as helicopter cannons, meaning the alliance would supply the main battle tanks for both the German and French armies.
German export controls of arms wouldn’t be undermined by a merger, as current rules would apply to shipping defense parts and components, the Economic Ministry said.
Critics routinely say arms policy is too lax in Germany, which retained its spot as the world’s third-largest weapons exporter last year.
Krauss-Maffei won a 1.89 billion euro ($2.58 billion) contract from Qatar in April to modernize the country’s tanks and self-propelled howitzers, while Saudi Arabia is exploring the purchase of Leopard 2 tanks, considered among the world’s most advanced battle vehicles.
About 82 percent of European investment in military equipment was spent nationally in 2012, according to the European Defense Agency. The combined company would boast an order book of about 6.5 billion euros.
Consolidation in the European defense industry has taken place only sporadically, with companies including Saab AB, Dassault Aviation SA and the Eurofighter Jagdflugzeug GmbH consortium battling over increasingly rare fighter-jet contracts. Saab, based in Sweden, announced this week that it plans to buy ThyssenKrupp AG’s submarine-making unit.
France had long pushed Nexter to forge ties with other European armaments makers, including closely held Krauss-Maffei and Germany’s Rheinmetall AG. In 2011, talks collapsed between ThyssenKrupp and French contractor DCNS SA over a possible naval venture that would have formed a so-called Airbus of the seas.
Defense spending by EU member states excluding Croatia and Denmark fell 0.6 percent to 189.6 billion euros in 2012, declining for a fifth year, according to EDA data. Defense-equipment procurement rose 17 percent to 34.2 billion euros, or 18 percent of total spending after having slumped to 29.2 billion the previous year, according to the EDA.
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