Breakingviews - Franco-German defence IPO hits private equity snag
BERLIN, May 16 (Reuters Breakingviews) - KNDS was about to bag a great deal. The Franco-German tank maker had a call option to up its stake in Renk (R3NK.DE), opens new tab, a $6 billion German-based maker of gearboxes for armoured vehicles, from 7% to 25%. With the call price at 20 euros a share and Renk currently trading at nearly 60 euros, KNDS faced a nice-to-have paper profit of more than 730 million euros. Yet Triton Partners, the buyout firm owning the shares, is having second thoughts about handing them over. The dispute is now for a German court to decide, but it could alter plans by KNDS's shareholders for an initial public offering this year.
The options deal dates back to Renk's February 2024 listing, four years after Triton bought the unit from Volkswagen. The shares soared 20% on their first trading day, have risen threefold since then, and outperformed all other European defence companies this year. Triton says KNDS failed to get Italian regulatory approval, which KNDS alleges it didn't need.
The lawsuit at least gives time for the two parties to seek a compromise, via a higher price for the Renk shares – although maybe not the current market price. The gearbox maker said on Wednesday its revenue had jumped 14.7% year-on-year in the last quarter with order intake up 163.5%, but the share price only rose 0.5% on the news. The wild ride of defence stocks could be subsiding, as markets have digested and anticipated higher defence spending in Europe.
Triton may find this is a good moment to sell, while it's not in KNDS's interest for a prolonged dispute. The group is the key architect of the 'tank of the future' being developed by France and Germany after years of haggling. Its governance is already odd, forcing a German family group and the former division of France's defence ministry to work together.
KNDS is yet to confirm its listing plans. Yet based on the 3.8 billion euros of sales it booked in 2024, the company could fetch an enterprise value of up to 19 billion euros if based on the same revenue multiple as Renk – or 14 billion euros on the same metric as Hensoldt (HAGG.DE), opens new tab, the German defence electronics firm. As such, 730 million euros of option winnings constitute a material swing factor.
The tank maker could instead sell a stake to another industry player, as European authorities want more consolidation in the defence sector. Raising its holding in Renk to 25% would also offer the group another possibility: a reverse merger with its listed supplier that would remove the need for an IPO. Its current smallish Renk stake would however make that option less attractive for its owners. Another reason to cut a deal with Triton.
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CONTEXT NEWS
Germany's Renk, the maker of gearboxes for the Leopard 2 tanks sent to Ukraine, reported first-quarter revenue slightly below market expectations on May 14, but a growing pipeline of orders supported its growth.
The company posted 273 million euros in sales in the first quarter, up 14.7% over the same quarter last year, a slight miss compared with the 279 million euros seen in a Vara consensus.
Order intake increased by 163.5% to 549 million euros in the quarter, the group said.
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