Carlyle, KfW join forces in effort to buy Thyssenkrupp warship division, sources say

By Christoph Steitz, Emma-Victoria Farr and Tom Käckenhoff

FRANKFURT/DUESSELDORF (Reuters) - Private equity firm Carlyle and German development bank KfW are in talks to jointly buy most of Thyssenkrupp's submarine unit, three people familiar with the matter said, in the latest sign of how the Ukraine war is reshaping Europe's defence sector.

The plan to join forces and take a majority stake in Thyssenkrupp Marine Systems (TKMS) reflects growing investor interest in defence assets as well as efforts by Berlin to keep control over what it considers to be key military technology.

All three parties are holding talks about a deal that would hand Carlyle a majority stake in TKMS, while state-owned lender KfW would hold a blocking minority, the people said. Thyssenkrupp would own a minority stake, they said.

Carlyle and KfW declined to comment.

Thyssenkrupp is currently running a dual-track process for TKMS, which could result in either a sale or spin-off of the division that makes submarines, frigates as well as sensor and mine-hunting technology.

A deal would be a milestone in Thyssenkrupp Chief Executive Miguel Lopez's efforts to disentangle the sprawling conglomerate, which is also in the process of selling a stake in its steel unit to Czech billionaire Daniel Kretinsky.

KfW has completed a preliminary review into a possible deal and is now preparing a deeper assessment of the asset, which could be valued at between 1.2 billion to 1.6 billion euros ($1.3-$1.7 billion), as part of a two-stage process, the sources familiar with the matter said.

Berlin is ready in principle to take a stake in TKMS via KfW but requires more information on the division's business strategy. "We won't buy in blindly," a senior government source said.

Separately, Carlyle, which has been carrying out due diligence at TKMS for the past months, confirmed its interest in a letter to Thyssenkrupp's supervisory board last month in which it asked for more detailed discussions, the people added.

Delegations of both Carlyle and KfW recently visited TKMS sites in Germany for continued negotiations, the people said.

If all parties are aligned an agreement could be reached as soon as September, the end of Thyssenkrupp's fiscal year, two of the people said.

SECTOR CONSOLIDATION

No decisions have been made and talks could be delayed or fall apart, the people said, pointing to potential differences over valuation or other conditions that could emerge down the line.

A spokesperson for Thyssenkrupp confirmed it was running a dual-track process for TKMS and that it was in talks with Carlyle and the German government.

Efforts to sell TKMS reflect a change in Europe's defence policy in the wake of Russia's war on Ukraine, which has provided momentum for potential consolidation in a sector traditionally dominated by national interests.

The idea behind a sale of TKMS is to take a first step to create a consolidation platform which might pave the way for pan-European tie-ups or mergers in the future, something industry executives have championed for years.

Italy's Fincantieri, which already cooperates with TKMS, has been keen on a tie-up, its CEO Pierroberto Folgiero said last year.

CEO Lopez said this week that the process for TKMS, which employs 7,880 and accounted for 11.4% of the Thyssenkrupp group's 703 million euros in adjusted EBIT last year, was ongoing.

"We're further along than ever before," he said.

Unlike a spin-off, a sale does not require approval at Thyssenkrupp's annual general meeting, potentially making it the more straight-forward option, the people said.

Labour union IG Metall is participating in the process for TKMS and held talks with Carlyle last month, as the union aims for a best and fair owner agreement to protect sites and jobs.

The substantial involvement of unions is seen as an advantage in current negotiations compared to the sales process for Thyssenkrupp's steel unit, where IG Metall and management have clashed.

($1 = 0.9293 euros)

(Reporting by Christoph Steitz, Emma-Victoria Farr, Tom Kaeckenhoff and Andreas Rinke; Editing by Susan Fenton)