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24 Nov 04. The FT reported that The largest shareholder in Rheinmetall, Germany’s leading defence company, is to sell its entire 42 per cent stake this week, opening the way to further consolidation in the sector.

The sale by the to institutional investors leaves the group without a dominant shareholder and better able to take part in the consolidation of the fragmented domestic defence market as well as the wider European one, analysts said. Rheinmetall used the withdrawal of its main shareholder to propose the merger of its two classes of shares to improve their liquidity, in a move that could catapult it into the top 40 largest German listed companies by market capitalisation.

The twin moves mark the latest stage in the modernisation of corporate Germany as companies alter their shareholder structures, and large industrial holdings are slowly unwound. The Röchling family said it was selling to widen the shareholder base and give Rheinmetall a “free hand for further growth in two business areas, automotive and defence”.

Foreign investors are thought to be wary of taking a large stake in Rheinmetall. Under a new German law, the government can veto foreign ownership of defence companies or limit holdings to 25 per cent. But the sale could help a domestic bidder or aid Rheinmetall to seek a merger. Krauss-Maffei Wegmann, the Munich-based defence company best known for its Leopard II battle tanks, is seen as a viable domestic partner.

It said yesterday it was following developments with great attention but ruled out buying any Rheinmetall shares for the time being. EADS, the pan-European aerospace and defence group, is considered another potential partner.

The sale by the Röchlings, who hold 74 per cent of Rheinmetall’s more illiquid common shares and 11 per cent of its preferred shares worth about €630m ($829m) on Tuesday’s closing prices, marks the latest divestment of a German company by a family. Family shareholders have recently sold stakes in Beru, the car-parts maker, and builder Ed. Züblin. Rheinmetall did not say on what basis its preferred shares, which do not have voting rights, would be transferred into common shares. But brokers at ICF said the move could mean it ends up in the top 10 most valuable companies in the mid-cap index with a market capitalisation of about €1.5bn. Analysts said the sale would put pressure on the shares in the short term, but over time a larger free float and better liquidity could stoke demand. Rheinmetall’s preferred shares closed down 4 per cent at €37.27, while its common shares fell 11 per cent to €37.20.

Comment: The final pieces of the European land systems business reorganisation can now move forward with this announcement. Expect moves from Krauss-Maffei to protect its market share but this may be in the short term and we can expect moves from the new BAE SYSTEMS segment, GD and United Defense. France, once again remains the only country reluctant to slim down its land systems business with Panhard, RVI and Giat still burgeoning enterprises. There is little hope of any of the majors running their slide rule over Giat in particular given its current financial and structural position

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