PARIS — A change of government in France, a German appetite for acquisitions and financial need in Italy are fueling fresh hopes for mergers and acquisitions in the European land defense industry, analysts and industry executives said last week at the Eurosatory trade show here.
The May election of a French socialist administration lifted hopes for industrial consolidation ahead of expected military spending cuts as the government looks to balance the budget.
In France, land systems company Nexter believes the time is ripe to sign up a European partner, while Renault Trucks Defense (RTD), owned by Swedish truck maker Volvo, is in advanced talks to acquire Panhard General Defense.
In Italy, Oto Melara is in play as Finmeccanica seeks partners and 1 billion euros ($1.26 billion) in asset sales to reduce debt.
Rheinmetall of Germany, meanwhile, has bought arms companies, including Norway’s Simrad Optronics in 2010, winning access to growing regional markets around the world. That record of acquisitions has made the company a natural candidate for any deal that comes to the market.
“There are two important influences in Europe today,” said Flavio Marchesoni, sales and marketing director at Italy’s Iveco Defense Vehicles. “One is Rheinmetall with its policy of acquisitions in Europe, and second is the French move to consolidate.”
Marchesoni said the market and budgets create an atmosphere in which companies must either consolidate, find a way to go it alone or die.
“Any political choice or decision will be forced by the market,” he said. “We cannot have any more excuses. We are forced by industrial circumstances.”
The French land weapons sector is widely viewed as slow to reorganize, and the urgency has never been greater with the domestic budgetary outlook so dark.
There had been hopes the government would announce moves at the 2010 Eurosatory show here. But there was silence, an analyst said.
“We lost two years,” the analyst said.
Although an RTD-Panhard deal may be relatively small in financial terms, it is seen as an important step toward domestic consolidation.
The two sides are close to an agreement, executives from both companies said at the Eurosatory International Exhibition, which closed June 15.
Volvo is a hard bargainer in financial terms, but the price gap is small, a source close to Panhard said. Issues such as assurance against dismantling the company and continuation of management need to be settled.
Perhaps it was an effort to push Panhard that last negotiating mile when Stefano Chmielewski, president of Volvo group government sales, said June 12 the company talked to everybody — listing Nexter, BAE Systems and Finland’s Patria group — before concluding with Panhard.
Volvo wants to make 1 billion euros in government sales, including defense, by 2015 and double that figure by 2020, compared with less than 400 million euros in 2011, Chmielewski said.
RTD is key to hitting that target, with a goal of contributing 700 million euros by 2015. Adding Panhard to the business mix would help RTD meet the objective. RTD had 2011 sales of 250 million euros, Panhard 83 million euros.
A French mini-consolidation looks highly likely, an industry executive said.
“The movement we are seeing right now, notably the acquisition of Panhard by Renault and by association the Volvo group, is going to happen. I am absolutely convinced,” the executive said.
This consolidation makes sense from a French perspective, but from a European and global one, the result is the French market will be even less open, the executive said.
“It is a local solution to a local problem that will have consequences in the global marketplace because it lessens the opportunities for foreign suppliers in France, and increases French defense industry strength in their global offerings,” the executive said. “From the French perspective, it’s the perfect solution.”
As a footnote, RTD had talked to Nexter, but the discussions failed to yield a merger agreement, as the state-owned status of the latter was seen as a problem.
“The discussions were also, let’s say, held in the Cabinet of the minister. So it was very interesting for us to go deeper,” Chmielewski said.
“The problem is always dealing with an entity that is state-owned and a private-owned entity,” the Volvo executive said. “From time to time, the goals and the objectives are seen under a different perspective.”
The difference in corporate culture between Nexter and RTD was seen as too great a hurdle, an industry executive said.
That leaves Nexter looking for a European partner.
A European Actor
The competitive “threat” from producers in China, South Korea, South Africa, Turkey and other low-cost countries has led to a mental shift by the European players, which all share the same analysis and are ready to reorganize on a European basis, Nexter CEO Philippe Burtin said.
“We have a world that has changed,” he said June 7. “We have to restructure European industry. Attitudes have changed. People’s minds are ready for this European restructuring.”
One of his objectives, alongside rallying French forces, is to create this European actor.
“It’s on my road map,” he said.
The aim is to create such an actor that is owned by European capital and is under European control, so equipment can be deployed without requiring clearance from Washington’s international traffic in arms regulation regime, Burtin said.
Nexter, essentially a platform maker and integrator, needs a partner to help boost its reach and access new foreign markets, said Hélène Masson, senior research fellow at the Fondation pour le Recherche Stratégique, a think tank here.
Rheinmetall, strong on systems integration and electronics, could be one of the options considered, she said. The German company has critical mass, important when competing with American companies, and has a long international reach thanks to a string of foreign acquisitions.
Nexter has a positive feature that should make it more attractive: Partnering with it would potentially give access to the French Army’s Scorpion modernization program, notably the Véhicule Blindé Multi-Role, a multirole armored vehicle, and the Engin Blindé Reconnaissance et Combat, a light tank.
But Nexter’s state ownership is always seen as a negative. To counter that, the French government must open up Nexter’s share capital, reducing its stake, not necessarily by selling shares in the stock market but through a trade sale to industry, Masson said.
Germans Looking Outward
The German majors, however, show little warmth toward Nexter and a European consolidation.
Tank builder Krauss-Maffei Wegmann (KMW) “is family owned and will remain family owned,” an industry source said.
The company has a three-pronged approach to maintaining growth and developing new technology to cope with falling defense budgets: looking for foreign customers, adapting leading-edge defense technology for civilian use, and joint venturing.
KMW formed joint ventures with Rheinmetall on the Puma and Boxer armored vehicles.
A lack of visibility on the geopolitical landscape makes it hard to see the nature of the demand for military products over the coming decade, the industry source said. But retaining engineering capabilities and sophisticated technology are seen as the keys to ensuring KMW is still a player in 10 years.
“KMW is well-positioned in its field,” the source said.
Defense made up the bulk of KMW’s 2011 sales of 936 million euros.
France, however, has made some small but important restructuring moves recently.
An agreement between Safran and Thales to cooperate on their subsidiary, Sofradir, an infrared detector maker, has been much underestimated, Sagem CEO Philippe Petitcolin said. The parent companies are transferring technology developed in-house to Sofradir, and have set up a commercial joint venture.
In another mini-restructuring, Safran bought up a stake in Roxel, an Anglo-French maker of rocket motors for missiles, co-owned with MBDA. That move has been a success, said François Rodriguez, Roxel’s vice president for sales and business development