Tank maker KNDS comes late to the European defence boom
The Franco-German group might fare better reviving a previously rejected alliance with Rheinmetall
Timing is critical on the battlefield, and in the capital markets. Infelicitous, then, that Franco-German tank maker KNDS is aiming to go public just as the once-blistering defence rally moves into reverse.
Europe’s aerospace and defence stocks, gauged by the Stoxx sub-index, nearly quadrupled between Russia’s full-scale invasion of Ukraine and this January; they have now shed a fifth. Artillery maker Rheinmetall, a huge beneficiary of Germany’s pumped-up defence spending, flunked analysts’ expectations on sales and profit in the first quarter, driving its shares lower.
There are still strong arguments for vastly increased defence spending, including wars, national security and the US’s reluctance to pay for world peace. Nato allies have committed to lifting spending to 5 per cent of economic output a year by 2035. But finding the money is proving tougher, and companies are suffering from contract delays.
KNDS has its own issues. Its equal ownership by German families and the French state complicates any initial public offering. Berlin, for national security reasons, wants to take on some of the families’ holdings but negotiations have dragged over stake size and price, as well as politics. Chair Tom Enders has said he will press ahead in the summer regardless of resolution, but investors should want to see ownership issues clarified first.
Views are also shifting on what equipment defence entails. KNDS’s Leopard 2 tanks define the theatre of war, but are increasingly overtaken by fancier airborne kit such as drones and interceptors. That pivot has driven German drone maker Helsing to an $18bn valuation and Anduril, the US tech group backed by Peter Thiel, to $60bn. KNDS’s work with start-ups to incorporate drones and the like into its systems pales by comparison.
Against that backdrop, a proposal by Czech ammunition maker Czechoslovak Group to buy a stake in KNDS from its German family owners might seem like a helpful development. Political resistance, though, as well as Czechoslovak Group’s own falling share price, suggest very long odds on such a deal happening.
KNDS might fare better reviving a previously rejected alliance with Rheinmetall, which has in the past proposed buying a stake too. The duo already co-operate on a host of military kit, including self-propelled howitzers and in Boxer and Puma fighting vehicles. Moreover, Rheinmetall offers a roadmap for diversification, having expanded into shipbuilding, drones and space.
A targeted valuation of up to €20bn looks far-fetched. Even if KNDS matched Rheinmetall’s sales growth and profitability last year and this, it would be on course to make just €800mn of operating profit. At the top end, investors would need to be prepared to pay 25 times that, when Rheinmetall trades at 20 times, according to LSEG. KNDS has missed the moment when investors will bid up anything with a chance of ending up on the front line.