• German procurement chaos dents investor trust as KNDS IPO falters
• Ukraine, Iran drone performance complicates procurement planning
• Defence spending promises necessary but insufficient to drive deals

Sometimes you have to wonder what they’re playing at. A poorly timed German military procurement announcement has derailed KNDS’s IPO, not long ago seen as one of the hottest listing prospects in 2026.

Meanwhile, Britain’s laboured efforts to increase defence spending have hastened Sir Keir Starmer’s exit from Downing Street.

Caught between Russian belligerence and a US attitude towards the continent that runs from indifferent to hostile, Europe’s understandable push for strategic autonomy is at risk of faltering.

While concerning from a geostrategic standpoint, it’s also a real headache for asset allocators and dealmakers hoping to capitalise on the moment.

Governments simply haven’t proven themselves reliable partners, even when their own interests are in play.

The German government had been slated to take a 40% stake in Franco-German tank manufacturer KNDS at listing. Smoothing the pathway towards a solid market debut and assisting aftermarket performance would have aligned strategic interests with investors’ hunger to get capital to work in an undeniable secular trend.

That would be too easy. Berlin instead decided to abandon the multibillion-euro F126 frigate project the day before KNDS filed its intention to float. Rheinmetall was slated to be lead contractor on the project and its share price…tanked, falling 18.7% on 23 June.

Barely a week into pre-marketing, KNDS pulled the IPO effort.

In a more measured world, putting a doomed frigate programme out of its misery might be considered good government. And the read-across to KNDS – with its land-vehicle focus – would be limited.

Unfortunately, the cancellation only heightened a sense that Chancellor Friedrich Merz’s planned defence spending bazooka of several hundred billion euros is being channelled through procurement processes that are not fit for purpose.

Doubts over the build out of Germany’s Medium Forces capability will surface during federal budget negotiations, with a first draft expected later this month. Currently, EUR 105.8bn is earmarked for defence spending in 2027 – up from EUR 82.7bn this year.

Any sign that budget is turning into a political football would be a problem for KNDS and every other regional defence player. Will Germany exercise its option to increase orders for KNDS’s armoured Boxer vehicle to 398 from 198? Will it look to expand its Boxer ambulance and driver training fleet?

In the wake of the F126 decision, it’s simply not clear whether German commitments will always convert into defence OEMs’ revenue book entries.

Droning on

Of course, not all the blame should be laid at Berlin’s door.

An oft overlooked aspect of KNDS’s equity story in the months leading up to its IPO launch was that military top brass are worried about the product mix becoming increasingly redundant in theatres of conflict.

Russia’s advance in Ukraine has been frozen along broadly the same frontlines since 2024, as drone warfare has lessened the impact of tanks and heavy armoured vehicles on the conflict.

The effectiveness of drones over traditional heavy armaments was again on full display following the outbreak of war in the Middle East, with Iran’s use of Shahed drones in a broader campaign of asymmetric warfare allowing it to go almost toe-to-toe with the far better armed United States.

For some investors, KNDS was pitching a product in which they no longer had much interest.

“It’s tanks, not drones,” said a buysider looking at the IPO. “It just isn’t as exciting for many investors.”

As with any prospective IPO, there was a price for KNDS the market would have been happy to pay.

Investors speaking to this news service said that they would be happy to buy into the business at a market cap of EUR 10bn, stretching perhaps to EUR 12bn at the top of an IPO range. That proved to be too low for KNDS shareholders the Wegmann and Bode families, alongside the French state.

A higher valuation down the line would require optimism about KNDS’s ability to master new product lines, including in the drone space. But even here, politics may be playing a role in holding back that potential.

KNDS was formed via the 2015 merger of German group KMW and French player Nexter. More than 10 years later, the corporate structure and product offering still reflects that heritage: Leopard tanks made in Germany; Leclerc tanks made in France.

“They cannot develop one single tank programme,” a source familiar with the company told Continental Drift. Indeed, the Main Ground Combat System designed to replace the Leopard 2 and the Leclerc in the 2040s is a byword for delay, political interference and union sabre rattling.

The source added that one senior KNDS stakeholder had told him it “wasn’t the worst thing” the company had made limited progress on integration and could even split again “if needed”, should political tension between Paris and Berlin make that the most viable option.

Ever closer union?

If even European Union partners like France and Germany cannot agree on shared strategic objectives, the UK’s desire to be a core participant in any continental military project runs the risk of descending into farce.

On 11 June, UK Defence Secretary John Healey resigned his post, arguing Starmer had been “unable […] to commit the resources that the nation needs to defend the country at this time of rising threats”.

Junior minister Al Carns – a square-jawed military man with a firm eye on advancement within the ruling Labour party – also threw in the towel. Responding to Starmer’s Defence Investment Plan (DIP) unveiled earlier this week, committing the UK to get spending to 2.7% of GDP by 2030, Carns posted on social media in exasperation.

“The majority of the defence budget is still being spent on legacy heavy-metal platforms and big-ticket programmes that take a decade to arrive and a fortune to maintain […] GBP 5bn over four years on drones is a start, but it is a small proportion of the entire equipment plan.”

Can the political will to address seismic geostrategic challenges overcome the vested interests of political incumbents and weary bureaucracy?

As evidenced by Apollo’s commitment to invest EUR 100bn in Germany over 10 years, new fiscal pathways should crowd in private capital. This brings with it the attendant prospect of fresh listings, M&A and – even more likely – multiple joint ventures built around materiel programmes.

Notwithstanding Carns’ doubts, London-listed BAE Systems’ share price has climbed 8.5% since the DIP was unveiled.

But as the KNDS debacle demonstrates, traditional procurement foul-ups can easily derail any positive momentum. For Europe to drop the ball in this generationally defining moment would be indefensible.

by John West and Samuel Kerr

Continental Drift is a weekly column offering commentary on the macroeconomic, political, and policy forces shaping the M&A landscape across the US and Europe. The opinions expressed here are those of the writer only.