Handelsblatt Exclusive Germany OKs Airbus Unit to KKR, Carlyle

Germany has directed Airbus to negotiate with U.S. investors KKR and Carlyle, which are jointly bidding €1.3 billion for the firm's defense electronics unit, Handelsblatt has learned. A deal would largely complete Airbus's exit from military aircraft and weaponry.
The sale of Airbus' defense electronics unit to U.S. private equity firms KKR and The Carlyle Group would accelerate the CEO Tom Enders' restructuring around civilian aircraft.

Three years ago, Airbus Chief Executive Tom Enders wanted to shake up the European defense industry with a mega-merger. But the German government vetoed his plan to fuse Airbus with Britain’s BAE Systems.

Then in early 2014, the German economics minister, Sigmar Gabriel, stopped Airbus from selling €500 million in targeting systems to Saudi Arabia made by its Optronics unit. That angered Mr. Enders, who had orchestrated the purchase of Optronics three years earlier from Carl Zeiss to expand Airbus beyond aircraft and missiles into high-end optical components.

The government’s veto of the BAE Systems and Optronics deals convinced Mr. Enders, who is German, that the best way forward was to shrink rather than expand Airbus' defense division, simplifying its mission to producing the A400M military transport aircraft, the Eurofighter jet, refuelling aircraft and missiles.

Internally at Airbus, the retreat from military technology is known as Operation “Orlando.” Some 5,300 jobs were cut in the defense division and Airbus put its defense electronics business up for sale.

Now, it’s in the final round of talks with U.S. private equity firms KKR and The Carlyle Group. The German government has approved the sale in principle, sources close to the negotiations told Handelsblatt.

The German government’s veto of the BAE Systems and Optronics deals convinced Airbus CEO Tom Enders, who is German, that the best way forward was to shrink rather than expand Airbus' defense division.

For Mr. Enders, the sale is a milestone in his plan to restructure the aerospace group around civilian, instead of military, aircraft. The Airbus chief is convinced Europe lacks the political will to cooperate in security and defense policy.

The military equipment business is volatile and subject to political whim.

That was reinforced again this week as Poland, which recently elected a conservative national government, signalled it may cancel a €3-billion order to Airbus for 50 military helicopters, Reuters reported on Tuesday.

Poland's new conservative government has steered an anti-German line since coming to power. Germany, along with France, Spain and Italy, are co-owners of Airbus.

According to Reuters, Poland's newly elected euro-skeptic Law and Justice Party want to award the helicopter deal to companies that produce in Poland such as Sikorsky, a unit of U.S. defense maker Lockheed Martin, and Italy's AgustaWestland.


Quelle: dpa
</a> An Austrian Eurofighter made by Airbus flying near the World Economic Forum summit this month in Davos, Switzerland.
(Source: dpa)


In Germany, the government would prefer Airbus sell its defense electronics business, which employs 4,800 locally, to German bidder Rheinmetall to safeguard the jobs and sensitive technology.

But U.S. private equity firms KKR and Carlyle have “significantly overbid” the Düsseldorf-based rival, sources close to the talks said. The current price on the table is more than €1.3 billion, or $1.41 billion, well above the €1 billion Airbus had been aiming for.

That’s why Airbus is now in exclusive talks with the American financial investors. It hasn’t reached a deal yet because the German government is demanding job guarantees and protection for key German technologies such as radar, sensors and targeting systems.

Another complication is that the Airbus business to be sold includes militarily sensitive high-tech border security systems that use biometric identification, radar and infrared surveillance. Airbus is installing these control systems in Saudi Arabia, Romania and Algeria — and these governments need to be consulted on any change in ownership.

The involvement of KKR and Carlyle is also a potential problem because private-equity firms tend to only be temporary owners and aim to resell their acquisition at a profit after three to five years, said industry insiders.

But Airbus is confident it will be able to agree to a deal in the first quarter, sources familiar with the situation say. It would render Europe’s biggest aerospace company significantly more civilian: Airbus believes that would be a good thing because global sales of passengers jets like the Airbus A320 and new A350 are booming.

There’s a lot of mistrust — but also a lot of economic pressure to merge. Most western European countries have cut their defense budgets, squeezing the revenues of arms makers.

Another big civilian jet deal may be imminent: Iranian President Hassan Rouhani, in Europe this week, may commit Iran to buy up to 114 Airbus jets as part of the country’s modernization drive following the lifting of economic sanctions.

If the defense electronics deal goes through, Mr. Enders will have completed most of his restructuring. Remaining on the block would only be Bosent, a supplier of secure police radio equipment, as well as Atlas Elektronik, a venture with Thyssen-Krupp in torpedoes, sonar and underwater equipment.

Thyssen-Krupp has first right of refusal on Atlast but doesn’t want to exercise it, according to sources.

Turning Airbus's revamped defense division into a profitable company will fall to Dirk Hoke, who is to start in April. Mr. Enders poached him from Siemens. The appointment was a surprise because Mr. Hoke, 46, has no defense industry experience. At Siemens, he was last responsible for selling drive systems for trains and ships.

Mr. Hoke's top priority will be to stop the scandals and gaffes that have beset the division. He will also need to find new buyers for the Eurofighter when its production for the German military ends in 2017.

The A400M transport aircraft, which is six years behind schedule, needs international customers to become profitable. Delays and cost overruns have boosted cumulative provisions against earnings to more than €5 billion.


The Biggest Arms Manufacturers-01


Germany is among the world’s biggest weapons exporters after the United States, Russia and China. But on closer inspection, the German defense sector is a patchwork of more than 2,000 companies.

Apart from Airbus, other national defense leaders include Rheinmetall, Thyssen-Krupp and Krauss-Maffei Wegmann, which are relatively small players globally in defense. This has fed speculation about a coming wave of mergers in the German defense industry, which so far has yet to materialize.

One executive familiar with the sector who declined to be named said any industry restructuring should happen on a European rather than national level. But most attempts at European tie-ups have failed for political reasons.

The Airbus-BAE merger was vetoed by Berlin. A merger of French shipbuilder DCNS with Germany's Thyssen-Krupp foundered on a disagreement over who should lead the combined company.

Deals in the past have often been thwarted by the vanity of top executives or Europe’s political leaders.

There’s a lot of mistrust — but also a lot of economic pressure to merge. Most western European countries have cut their defense budgets, squeezing the revenues of arms makers. Corruption makes it hard to get into new markets such as India and in countries of the Middle East, where Russia and the United States are already big suppliers.



Last year's merger of Germany’s Krauss-Maffei Wegmann (KMW) and France’s Nexter to create Europe’s leading tank builder could finally open the floodgates to more industry consolidation in Europe. The merged tank maker plans to boost exports and has a good chance of clinching the contract for developing a new combat tank for several European countries.

The creation of KMW-Nexter has put Germany’s Rheinmetall under pressure. Rheinmetall had held merger talks with KMW several times in recent years, but failed to reach a deal. Rheinmetall Chief Executive Armin Papperger wanted to create a German national champion capable of taking on heavyweights from the United States.

Rheinmetall also failed to buy any of the Airbus defense assets up for sale, and couldn’t raise the €2 billion asking price for the shipbuilding division of Thyssen-Krupp.

Rheinmetall is now aiming at cooperation agreements, and has a deal with a Polish defense company to develop and sell systems including amphibious vehicles.

But the German weapons maker isn’t the only company looking for acquisitions. Industry sources said French shipbuilder DCNS and Italy’s Fincantieri are sounding out possibilities for mergers. Sweden’s Saab is also said to be on the lookout for acquisitions. It competes with Airbus, especially in combat jets.


Markus Fasse and Martin Murphy are editors at Handelsblatt who write about markets and companies, including Airbus. Thomas Sigmund is Handelsblatt's Berlin bureau chief. To contact the authors: [email protected], [email protected] and [email protected]