Ammo, tanks and AI drones: defence offers bright spot for bankersEurope’s defence industry is emerging as a rare hotspot for dealmaking activity as strong revenue prospects encourage companies to consider acquisitions, alliances, listings or fundraisings, although bankers said that while the pipeline of deals is long, it might be slow moving. Bankers said potential IPO candidates include Franco-German military defence system supplier KNDS; IDV, the defence unit of Italian truckmaker Iveco, Prague-based ammunitions maker The Czechoslovak Group and a spinoff by Germany’s ThyssenKrupp of its warship division. Cross-border M&A may be a challenge as countries protect their defence industries, but domestic acquisitions are expected as firms aim to be national champions. Joint ventures and international alliances could also prove fruitful, as Italy’s Leonardo and Germany’s Rheinmetall have already shown. “I think there will be more in-country M&A, more IPOs and more big partnerships,” said an industry banker at a major investment bank, who asked not to be named. Perhaps more exciting is the prospect of work for a swarm of smaller innovative firms in defence technology. They are likely to be targets for the big incumbent military equipment providers that need new and more agile products. Or the younger firms may raise funds for growth from a deepening pool of investors willing to buy into the sector, and use it to disrupt the established order and make large-scale production more efficient and procurement easier. Bankers said there are dozens of such companies, including Bavaria-based drone technology developer Helsing, which raised €450m in July in a Series C financing round that valued the firm at about €4bn, or Quantum Systems, which raised €40m in September and is aiming to expand production. "The traditional players will continue to benefit – there is a need for armoured vehicles, tanks, transportation, air defence, missiles and ammunition,” said Frank Bretag, UniCredit's head of industrials advisory, which includes a defence subsector. “But we’re also going to need new capabilities above and beyond the traditional technologies and equipment and an interaction between the traditional and the new, whether that’s drones, air defence, cloud computing, artificial intelligence or space capabilities. “There is a lot of need from the traditional players to establish know-how on that, which they could do via acquisitions or cooperation with other players." "Time to re-arm" All the activity is a result of a seismic reshaping of the military landscape in Europe after Russia’s full invasion of Ukraine in February 2022 and fears that the US commitment to defending Europe is waning. Europe is expected to increase defence spending by €800bn or more. EU governments want European companies to be the main recipients, although they lack production capacity, and US firms are also expected to reap some of the windfall. Share prices, valuations of private companies and investment banking fees have all jumped on the back of that prospect. The STOXX Europe Aerospace & Defense Index closed on Wednesday at 2,098 points, almost four times the level in October 2020, up 64% since the start of 2024 and up 23% this year, despite a modest pullback over the last month. The jump in valuation for private firms is best shown by US defence technology company Anduril, which is reported to have been in talks to raise US$2.5bn at a valuation of US$28bn, double its valuation six months earlier when it raised US$1.5bn. Similarly, the valuation put on Helsing in July was more than double its price tag in a fundraising less than a year earlier, and other private firms have seen valuations soar, which bankers said give them capacity to strike deals of their own. “After the rise in share prices and in private valuations, there is acquisition currency available. There is also a very deep pool of additional capital available
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