German tank manufacturer Krauss-Maffei Wegmann and French government-owned company Nexter plan to sign an agreement in July, after tough negotiations between the companies and the French and German governments.
The alliance between the two leading European tank and cannon manufacturers will be the biggest consolidation in the European defense industry since the founding of EADS/Airbus in July 2000, and is expected to strengthen the splintered E.U. defense sector.
“Our goal is to sign in July, the 13th would be nice, but the 14th of July [a French national holiday] would be nicer,” KMW's chief executive Frank Haun said in Paris.
At a conference sponsored by the business newspaper “Les Echos,” Mr. Haun said, “Our dream would be for (Nexter CEO) Philippe Burtin to ride in a Leclerc tank and for me to be in a Leo in the parade down the Champs Élysées, but it likely will not come to that.”
Nexter and KMW have been talking about a merger since February 2006.
Mr. Haun said the Nexter chief executive had visited him at the time to sound out the opportunities for a merger, but that it wasn’t until July 2014 that things had moved far enough along to make the talks public.
The biggest stumbling block for the merger has been the differing national arms export regulations.
The merger is called “Project Kant,” with Kant an acronym for "Krauss-Maffei Wegmann and Nexter together.”
Nexter produces rifles, rocket-launchers, heavy armored personnel carriers, the combat tank Leclerc and ammunition.
KMW is best-known for making the Leopard combat tank, but also builds the armored personnel carrier Puma and is involved in numerous other weapons systems, some of which are produced together with Rheinmetall.
KMW’s export business is stronger than that of its French partner Nexter.
The two companies will not merge completely right away, but form a holding company for the first two years.
“We complement each other very well,” Mr. Haun told Handelsblatt. “Nexter has technologies that we do not have, and vice versa.”
Together, they will have a “complete range of products” in artillery and tanks, he said.
Mr. Burtin, Nexter's chief executive, said that the merger is necessary considering the increasing competition from developing countries.
“It is crucial for us to reach a critical size in order to remain competitive with the costs,” he said, adding that the goal of KMW and Nexter is “to remain a global player and not fall into becoming a niche supplier.”
Together, the two companies have about $1.8 billion in sales, which does not make them one of the biggest in the industry. But those figures are also due to the fact that the weapons systems sold by the companies cost considerably less than, for example, the extremely expensive combat aircraft produced by competitors.
While in Paris, Mr. Haun was critical of the fact that soldiers from European countries “fight side-by-side in Afghanistan and elsewhere, but they all have different materials.” Politicians and the armies haven't solved the problem, he said, and there are not common standards, which is why industry is now getting involved. “You can't just throw money out the window like this,” he said.
However, Mr. Haun told Handelsblatt that not all valuation issues will be solved by a merger with Nexter.
The goal from the beginning was to value the two companies equally, but a problem arose in December 2014, when the French Defense Ministry gave a consortium of Nexter, Thales and Renault Trucks Défense a contract in the billions for more than 100 light-wheeled tanks.
The French side then allegedly demanded an equalization payment from KMW, because Nexter was then worth €2 billion – €500 million more than KMW.
Sources in the French industry later said those were rumors intentionally spread by opponents of the merger.
The biggest stumbling block for the merger has been the differing national arms export regulations, but, according to Mr. Haun, this has since been cleared up.
The German federal government insists that German export regulations remain binding.
France, however, wanted to align itself with the regulations that have applied since the 2001 Farnborough Framework Agreement between Britain, France, Sweden and Germany. That contract is supposed to simplify defense industry collaborations and prevent conflicts when it comes to exports. It provides for each joint defense program to have one export permit issued, which would then not have to be renewed for each individual delivery.
“For us, the German rules continue to apply, and for Nexter the French,” said Mr. Haun. “It was never our goal to circumvent German regulations. We just want to help streamline defense production,” he said.
He added that in the coming years there will be an attempt to agree on harmonizing the export regulations.
Still, it will take another 10 years before the first weapons system jointly developed by Nexter and KMW appears. The director of the French Defense Agency, Laurent Collet-Billion, said that agreement over the export regulation that applies to a merger was very difficult, “but in the case of Nexter-KMW we were successful.”
Berlin and Paris have been negotiating for months regarding the rules for arms exports.
When French defense companies wanted to assemble supplies from Germany, for a long time they did not need approval from the German government as long as the value-added share amounted to less than 20 percent (de minimis rule).
The German Economy Minister Sigmar Gabriel toppled this agreement from the 1990s, in order to temporarily block the sale of Airbus military helicopters to Uzbekistan. In doing so, he sparked considerable irritation in Paris and in the industry.
The resulting talks dragged on because the Economy Minister insisted on his rights of direct access.
In Berlin there was a suspicion that Mr. Haun wanted to circumvent Mr. Gabriel’s strict export policies by way of France. The Economy Ministry has also long had difficulty finding a unified position on KMW and Nexter.
Industry sources said that while the Chancellery was more positive on the merger, the proponents and opponents wrangled with each other in Mr. Gabriel’s ministry.
Mr. Gabriel himself publicly declared that he preferred a purely national solution and only as a second step wanted to promote an international consolidation.
The fact that Mr. Haun gave a date for signing the agreement indicates that Mr. Gabriel has given the green light. Sources from the French side also said that they now believe the merger will be successful.
The French government now has the right legal conditions, as part of the Macron law, for economic reforms to allow the government-owned Nexter to merge with a private company. The reform removes the provision that required armory to be a government-controlled entity.