10 Aug 04. The FT reported that the German government is poised to prevent the takeover of Rheinmetall, Germany’s leading defence company, by a foreign investor.

“We want to keep our technological edge in building tanks in Germany,” government sources told FT Deutschland, the FT’s sister paper.

The move paves the way towards domestic consolidation in Germany’s fragmented defence industry.

The Röchling family, which owns a 42 per cent stake in Rheinmetall, is understood to be looking to dispose of its holding. Among the interested bidders are several private equity groups, including Cerberus, the Carlyle Group, Blackstone, KKR of the US, and Permira of the UK.

The potential sale of the stake has set off alarm bells in Berlin, where politicians fear key military technology could be lost to foreign companies. If a foreign investor were to emerge as the main bidder for Rheinmetall, the German government would for the first time be able to make use of the new foreign ownership law. The law, which came into force this month, gives the German government the right to veto foreign ownership in defence companies or limit holdings to 25 per cent.

Krauss-Maffei Wegmann, the Munich-based defence company best known for its Leopard II battle tanks, has been suggested as a viable domestic partner for Rheinmetall. Both KMW and Rheinmetall build battle tanks and are family-controlled. In 2002, the two formed a joint venture for the development of a new armoured Puma vehicle for the German army. KMW yesterday declined to comment on the potential sale.European Aeronautic Defence and Space, the aerospace group formed by the merger of German, French and Spanish groups, is another potential contender for Rheinmetall. EADS yesterday said that it “was not in talks” regarding Rheinmetall. The formation of alliances similar to EADS is seen as increasingly important to the survival of the German defence sector. The German defence industry has been weakened by rigid German export sanctions. The combination of falling domestic defence budgets and tight export restrictions, with almost no opportunity to sell to the US, has contributed to the sector’s decline.