In its 130-year history, German munitions-to-automotive group Rheinmetall has seen epochs come and go. With its acquisition of Spanish defence group Expal, it may now have fired the starting gun on a period of consolidation for Europe’s defence industry.
It is not difficult to see why Rheinmetall put Expal in its crosshairs. Germany — shaken out of its military ambivalence by the Ukraine war — is set to spend a lot more on defence. Factoring in rising base spend plus a €100bn special fund to be deployed over five years, it will invest about €70bn a year on average, or 60 per cent more than in 2019.
That suggests a bottleneck in production capacity. Stocks of ammunition are one sticking point — running low almost everywhere and further depleted by the Ukraine war. Enter Expal, the Spanish munitions group owned by Maxam — heir to Alfred Nobel’s explosives company — in turn partly owned by private equity group Rhône Capital. Expal has enough spare capacity to double sales from €400mn to €700mn-€800mn, Rheinmetall reckons.
Expal’s owners are capturing some of the upside. On an ebitda margin of 30 per cent, the purchase price implies an enterprise value to ebitda multiple of 10 times, a near-20 per cent premium to the sector, on S&P Global data. But if Rheinmetall really can double Expal’s sales, that falls to 5 times — a discount to the defence sector on 2025 estimates. On top of that, the deal makes strategic sense, bulking up Rheinmetall’s scale in a key segment.
Other companies may well follow Rheinmetall’s lead. Defence spending is on the rise Europe-wide. Italy, Sweden and Denmark have committed to invest 2 per cent of gross domestic product each. Front-line eastern European countries will do more. Even peace-loving Finland is adding €2bn to an annual defence bill of €3bn to €4bn.
The continent’s defence groups are likely to be on the prowl for midsized acquisitions to fill portfolio gaps or acquire production capacity ahead of expected orders. There would be a strong strategic rationale for the fragmented industry to look into larger deals, too.
But creating an EU-wide defence champion, with the scale to optimise R&D spend, would be a worthwhile objective in the current geopolitical environment — but much, much harder to pull off.
The Lex team is interested in hearing more from readers. Do you expect more consolidation in the European defence sector? Please tell us what you think in the comments section below.