By Geoffrey Smith
Investing.com -- The emergency created by the war in Ukraine is stirring up the European defense sector.
Germany's largest maker of land-based weaponry, Rheinmetall AG (ETR:RHMG), said on Monday it has agreed to buy Spanish ammunition maker Expal Systems from Maxam Corp. for around €1.2 billion including debt. It said the move will help it to build capacity in a market where a sudden surge in demand has followed years of underinvestment in defense by European governments.
"In a dynamic market situation propelled by massive demand for military equipment in multiple countries, the acquisition provides Rheinmetall with swift access to significantly greater capacity," the company said in a statement. Expal expects sales of around €400M in its current fiscal year, and Rheinmetall said it the deal may allow this to double.
Cross-border mergers in European defense are traditionally difficult, owing to governments' long-standing concerns about foreign control of an industry vital to national security. That has kept the sector fragmented and poorly adapted to adapt to challenges such as those created by Russia's war in Ukraine. As a result, Kyiv has had to rely largely on transfers of military aid from the U.S., rather than from its European neighbors to defend itself.
Rheinmetall indicated that the war in Ukraine had radically changed the long-term outlook for the sector.
"Given the expected large increase in demand from numerous nations, Rheinmetall wants to position itself as strongly as possible to address the anticipated inflow of new requests for tender for ammunition purchases," it said. It highlighted Expal's strength in "the fast-growing market for mortar and artillery ammunition", which it said complemented its own businesses.
Rheinmetall's stock rose 4.0% in Frankfurt on the news, hitting a three-month high. After more than doubling in the immediate wake of the invasion in February, the stock has suffered along with the rest of an energy-intensive German manufacturing sector in recent months, reflecting concerns that soaring prices for gas and electricity will crimp its profit margins.
In addition to facilities across Spain, Expal also has operations in Texarkana, Texas. It expects to keep all the plants open and made no mention of job cuts.
Rheinmetall said it is aiming to get the relevant regulatory approvals by summer 2023.