Leonardo clinches Hensoldt stake to boost presence in Germany

Leonardo, the Italian defence group, intends to use the purchase of a stake in military sensor maker Hensoldt as a springboard to expand its presence in Germany’s growing defence market, according to its chief executive. 

The deal, agreed at the weekend, could help drive European consolidation in the sector and eventually pave the way for the creation of a major defence electronics concern.

Under the terms of the deal, Leonardo will buy a 25.1 per cent stake in Hensoldt from private equity group KKR for €23 a share in cash or about €606m.

The Italian group will become Hensoldt’s largest shareholder alongside German state bank KfW, which bought a 25.1 per cent stake in March. KKR will maintain a share of about 18 per cent. The balance of the shares are listed in Germany. 

Leonardo held off competition from France’s Thales and Sweden’s Saab to clinch the purchase. 

“It is another step in the European defence system,” Alessandro Profumo, Leonardo chief executive, told the Financial Times. While Leonardo had “some presence” in Germany, it was a country where the company “could improve”. 

“Germany is an incredibly important country,” he added, noting that in a previous role as chief executive of UniCredit he had said that “you can’t be European without Germany”. 

“It is the same in this case,” Profumo added. 

The deal will strengthen Leonardo’s position in Europe’s three core defence markets: Italy, the UK and Germany. 

It is also an important step in what could be a series of strategic partnerships in defence electronics, according to industry analysts.

Leonardo and Hensoldt already co-operate on pan-European programmes including the Eurofighter Typhoon fighter. The two companies, together with Spain’s Indra, provide the advanced radar on the aircraft. The German air force last year ordered a further 38 Typhoons.

Longer-term, the two companies’ close relationship could help pave the way towards closer co-operation between Europe’s two future-generation fighter programmes, Britain’s Tempest and the Franco-German Future Combat Air System (FCAS).

In the UK, Leonardo is one of the industry partners working with BAE Systems on Tempest, the new generation fighter jet for the Royal Air Force. Hensoldt, meanwhile, is part of the FCAS consortium.

Defence industry analysts said that while it was unlikely the two programmes would come together, the respective aircraft would eventually have to fly together as part of Nato.

“It would make sense to explore whether the two programmes could share some commonality,” said one person familiar with the thinking.

Leonardo said it intended to fund the purchase of the stake through the sale of non-core assets and the flotation of a minority stake in DRS, its American military electronics arm.

The Italian group postponed the listing on the New York Stock Exchange in March citing adverse market conditions. Analysts had estimated that the group, which acquired the US unit in 2008 for $5.2bn, would sell between 20 per cent and 30 per cent of its subsidiary for at least $3bn.

Profumo said the company was ready to proceed with the listing as soon as market conditions allowed.