Germany's Defense Ministry on Wednesday canceled construction of six F126 frigates, the largest warship order placed by the country since the Second World War, citing "significant delays, huge cost overruns and unforeseeable risks" in a statement that ended Rheinmetall's months-long push to take over the program. Shares in Rheinmetall fell as much as 16.7 percent in Frankfurt to their lowest level in nearly 15 months, on pace for the company's sharpest one-day drop on record.
Defense Minister Boris Pistorius will instead buy eight smaller Meko A-200 frigates from ThyssenKrupp Marine Systems at a total budget of about 11.6 billion euros, the ministry said, with 6.3 billion euros covering the first four ships and an option for four more at 5.3 billion euros that must be exercised by the end of 2026. TKMS rose 8.2 percent at 1000 GMT.
The contract
The original order was signed in 2020 with Dutch shipbuilder Damen Schelde Naval Shipbuilding as prime contractor. More than 2 billion euros has been spent on the program, German magazine Der Spiegel reported, with some of that money written off. Rheinmetall, which acquired the Naval Vessels Luerssen shipyard in March, offered in May to take over the project for 12.8 billion euros, according to Der Spiegel. Chief Executive Armin Papperger said last month that the group expected to sign the F126 deal in the second quarter.
Rheinmetall declined to comment. TKMS said it was "pleased to be contributing to the strengthening of the German navy," adding that it had begun preparatory work in February and plans to deliver the first Meko A-200 in 2029.
Stock reaction
The Stoxx Europe Aerospace and Defense index led declines on the regional benchmark, falling 1.3 percent. European defense stocks have traded down year-to-date as investors weigh the prospect of an end to the wars in Ukraine and the Middle East. Rheinmetall entered Wednesday's session down roughly 30 percent from its January highs.
"You've got a very unstable environment and ongoing wars. That should feed into positive sentiment towards the defence sector, but it's not happening," said Michael Field, chief equity market strategist at Morningstar.
What's next
Berlin needs the Meko A-200 ships to meet NATO anti-submarine commitments beginning in 2028. TKMS said it sees scope to involve other German yards if the option for four more vessels is exercised. Both TKMS and Rheinmetall are bidding for German Naval Yards Kiel.
Rheinmetall officials had not publicly responded to the cancellation by press time beyond the company's decision to decline comment, and Berlin had not released a full statement of grounds for the choice between the rival shipbuilders.
Franco-German tank maker KNDS on Wednesday set out plans for a dual Frankfurt-Paris initial public offering that people familiar with the matter told Reuters could value the company at about 15 billion euros. Germany has said it plans to take a 40 percent stake in KNDS alongside France.