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Delegations of Carlyle, KfW recently visited TKMS for

talks

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Deal to buy majority of TKMS could be reached in early

autumn

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TKMS could be sold or spun off as Thyssenkrupp slims down

By Christoph Steitz, Emma-Victoria Farr and Tom Käckenhoff

FRANKFURT/DUESSELDORF, June 14 (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)