Rheinmetall shares fell as much as 17.3% in midday trading on Wednesday, putting the German munitions maker on track for its worst single day since 1989, after reports emerged that Germany plans to scrap a multi-billion-euro warship program the company had been expected to lead.
Berlin is planning to cancel its plans to build six F126 frigates, according to multiple media reports citing people familiar with the matter. Instead, Germany will purchase eight smaller Meko A-200 frigates from German company TKMS. The F126 program would have been the biggest warship commission in Germany since the Second World War.
Rheinmetall had been expected to become the lead contractor of the F126 frigate program in a deal worth as much as 12.8 billion euros, or about $14.5 billion, pending budget committee approval. The company would have taken over the contract from Dutch shipyard Damen Naval after years of delays. TKMS, the smaller peer that will now supply the frigates instead, rose 15% on the news.
CNBC reported that other European defense stocks also fell. Germany-listed Hensoldt and Renk dropped 5.1% and 5.8%, respectively. Sweden's Saab traded 3.5% lower, Italy's Leonardo fell 4.4%, and British defense giant BAE Systems lost 1.2%. The Stoxx Europe Aerospace and Defense ETF traded 1.9% lower. The pan-European Stoxx 600 index was largely flat.
Rheinmetall shares were already down about 30% from their January highs coming into Wednesday's session. European defense stocks had been trading markedly lower year-to-date even before Wednesday, as investors weighed the possibility of an end to the wars in Ukraine and the Middle East and questioned how much of governments' military spending commitments would actually be delivered.
Despite the sell-off, at least one analyst maintained that defense remains an attractive sector. Nalin Patel, PitchBook's Director of Research for EMEA Private Capital, told CNBC's Europe Early Edition on Wednesday that increased military spending, including by Germany as Europe's largest economy, makes defense "a compelling investment story."
"There's a lot of volatility within the market, however, defense is an area that is signaling particularly strong growth, so potentially the valuation is valid," Patel said.
The cancellation of the F126 program is a blow to Rheinmetall's naval ambitions. Analysts say the loss calls into question the company's target of 5 billion euros in naval revenue by 2030. Germany has pledged to build the strongest conventional army in Europe by 2039 and is also planning to take a 40% stake in tankmaker KNDS, which is due to go public soon alongside France. A year ago, NATO allies agreed to increase defense spending from 2% to 5% of GDP after years of pressure from Washington.
CNBC said it had reached out to Rheinmetall and the German government for comment.
