Rheinmetall sells automotive business, in talks with multiple investors

Rheinmetall is planning to advance a new round of strategic transformation, intending to divest its struggling automotive business— the "Power Systems" department— and shift its focus entirely to the rapidly growing defense and military sector. According to several financial and industry insiders, the company has entered preliminary negotiations with financial investor One Equity Partners (OEP) regarding the potential sale, but the transaction is still in its early stages and the final outcome remains uncertain.

Image source: Oliver Berg/dpa

The group declined to comment on OEP but stated, "Rheinmetall has been receiving acquisition inquiries from potential buyers for some time and has been negotiating with multiple bidders through a competitive process." Rheinmetall is "working to hand over the civilian sector (including all related businesses) to a reliable buyer and is carefully considering all options." The reporter was unable to reach OEP for comment.

The power systems department produces gasoline and diesel engine components for both civilian and commercial vehicles. For decades, this department has made significant contributions to the group's growth. However, since the outbreak of the Russia-Ukraine conflict in February 2022, the defense business has flourished. Since then, Rheinmetall's stock price has soared by 2000% and has been included in the German DAX index. The rearmament plans of Germany and NATO countries indicate that the defense business will see substantial profits for many years to come.

On the other hand, the power systems department is suffering from a crisis that automotive parts suppliers are generally facing, having long struggled to keep pace with the booming defense business in terms of growth and profitability. Although this department still accounts for one-fifth of the group's sales, reaching 2 billion euros, its business development has stagnated unlike the defense sector. The profit margin of the automotive parts supply business is 4.2%, which is also far lower than the 19% of the defense business.

In sharp contrast, since the outbreak of the Russia-Ukraine conflict in 2022, Rheinmetall's defense business has continued to expand, with defense electronics, armored vehicles, and ammunition businesses growing by 30%, 45%, and 60% respectively. Currently, almost all of the group's operating profit comes from the defense sector. Rheinmetall plans to increase the annual revenue of its ammunition and armored vehicle businesses to 10 billion euros each by 2030, while the military electronics business is set to reach 6 billion euros, with a clear direction for transformation.

Facing the sluggish growth of the automotive business and the overall decline in industry profits, Rheinmetall has clearly stated that the automotive parts segment is no longer the strategic core of the company. Especially in the European and Chinese markets, the trend towards electrification is becoming increasingly evident, and the market space for traditional internal combustion engine-related components is continuously shrinking.

Nevertheless, the union organization IG Metall and the employee representatives on the supervisory board still hope to retain the automotive business and promote the conversion of some factories to military applications. Currently, two automotive parts factories located in Berlin and Neuss have started renovation work to prepare for the transition to military production lines, but a full transformation is not realistic due to technical and economic constraints. Therefore, over the past two years, Rheinmetall has gradually sold off parts of its components business, including the sale of its large-caliber piston business in 2022 and the sale of its small-caliber piston business to Comitans Capital in 2024.

If the potential divestiture deal can be reached, it will further strengthen Rheinmetall's market image of "focusing on defense" and help it gain a more favorable position in the global military market, especially in the United States. Currently, the company has collaborated with U.S. defense giant Lockheed Martin, hoping to secure large orders for armored vehicles from the U.S. Army. Germany's domestic military spending is also set to increase significantly, with defense expenditures expected to reach 160 billion euros by 2029, three times the current amount.

To meet the newly added military demands, the German Bundeswehr is expected to procure up to 1,000 main battle tanks and 2,500 infantry fighting vehicles, which is three times the current stock. In addition, there are orders from Italy and Ukraine. These orders provide a continuous expansion drive for defense companies, including Rheinmetall, and give them more compelling reasons to focus resources on developing their core business.

Not only Rheinmetall is making business adjustments, but other defense companies like Renk are also considering divesting their civilian business, such as the plan to separate the slide rail components business used for turbines, electric motors, and ship propulsion systems.

However, not all companies are abandoning diversified business structures. For example, the family-owned enterprise Diehl, known for its air defense system IRIS-T, also produces water meters, aircraft toilets, and washing machine control systems; companies like Airbus and MTU continue to focus primarily on civil business. In contrast, if Rheinmetall can successfully divest its automotive business, it is expected to further improve its financial performance, surpassing the current group profit margin of 15%.

However, financial industry insiders indicate that Papperger is not under pressure to sell. Rheinmetall Group is currently valued at 85 billion euros, and only a high acquisition price could persuade this CEO to sell the automotive business.

Previously, Rheinmetall had informal negotiations with private equity firm Mutares regarding the sale of its automotive business. Two insiders confirmed this to the media. However, according to sources, the negotiations have not continued for now. Nevertheless, Mutares seems to still be interested in the automotive business. For example, this financial investor acquired the Austrian diesel engine manufacturer Steyr Motors for 1 euro in 2022, restructured it, and helped it successfully go public last year.

From the current situation, the global defense industry is a new round of "super cycle," while the traditional automotive parts business is facing shrinking pressure. Against this backdrop, Rheinmetall's strategic focus on the defense sector is becoming increasingly clear.