Rheinmetall's Strategic Divestiture of Power Systems: A Catalyst for Defense-Centric Growth

The global defense industry is undergoing a structural transformation, driven by geopolitical tensions, technological disruption, and a reorientation of industrial priorities. At the heart of this shift lies Rheinmetall AG, a German industrial giant poised to redefine its identity through the strategic divestiture of its Power Systems division. This move, now in active negotiation with One Equity Partners (OEP), represents not merely a financial restructuring but a calculated realignment with the secular tailwinds of the defense sector. For investors, the transaction offers a rare opportunity to capitalize on a company's metamorphosis into a pure-play defense manufacturer, unlocking value through capital reallocation and operational simplification.

A Strategic Realignment with Secular Trends

Rheinmetall's decision to offload its Power Systems division—a €505 million automotive supply business in Q1 2024—reflects a stark divergence in performance between its defense and non-defense segments. While the defense division accounted for 80% of 2024 sales and boasts a €55 billion order backlog, Power Systems has languished under declining margins. Operating profits for the division plummeted 70.4% year-on-year in Q1 2024, a casualty of delayed EV adoption and stringent EU emissions regulations. By exiting this volatile market, Rheinmetall is aligning itself with the accelerating demand for military technologies, where global spending is projected to grow at 5–7% annually through 2030.

The potential buyer, One Equity Partners, brings a compelling thesis to the table. OEP's track record in industrial revitalization—evidenced by its acquisitions of Comau (robotics) and Muehlhan (marine coatings)—suggests a strategic fit. Power Systems' expertise in hydrogen storage and thermal management aligns with OEP's focus on decarbonization and industrial innovation, creating synergies that could breathe new life into the division. For Rheinmetall, this ensures the unit is placed in “capable hands,” as CEO Armin Papperger has stated, while freeing the company to concentrate on its core strengths.

Unlocking Capital and Enhancing Valuation Multiples

The divestiture is expected to generate €1–2 billion in proceeds, a sum that could be reinvested in high-return projects such as Rheinmetall's XM30 Combat Vehicle program or its expansion into U.S. defense markets via American Rheinmetall. This capital reallocation is critical in a sector where R&D intensity and scale determine competitive advantage. By shedding underperforming assets, Rheinmetall can streamline operations, reduce execution risk, and improve EBITDA margins—a factor that could narrow its valuation gap with defense peers.

Currently, Rheinmetall trades at an enterprise value-to-EBITDA (EV/EBITDA) ratio of ~12x, significantly below the 15–20x multiples of peers like BAE Systems and Raytheon Technologies. A transition to a pure-play defense model, with its higher margins and growth visibility, could justify a re-rating. The removal of Power Systems' cyclical automotive exposure would further enhance the company's appeal to growth-oriented investors, who increasingly favor businesses with predictable cash flows and secular tailwinds.

Key Risks and Investment Catalysts

While the strategic logic is compelling, risks remain. The deal's success hinges on securing a favorable valuation—estimates place Power Systems at €1–1.5 billion—and navigating regulatory approvals. OEP's financing plans, particularly the need for co-investors, could also delay the transaction. However, these uncertainties are not insurmountable. OEP's industrial expertise and Rheinmetall's urgency to refocus on defense suggest a high probability of closure.

For investors, the next 12–18 months are pivotal. Regulatory updates, financing announcements, and valuation negotiations will serve as key catalysts. Positioning via direct investment in Rheinmetall (ETR: RHM) or through defense ETFs like XAR offers exposure to both the company's transformation and the broader sector's growth.

Conclusion: A Transformational Milestone

Rheinmetall's Power Systems divestiture is more than a cost-cutting exercise—it is a strategic pivot to capitalize on a once-in-a-generation defense boom. By exiting a declining market and reallocating capital to high-growth areas, the company is positioning itself to outperform in an era of heightened geopolitical risk. For investors, the transaction represents a compelling inflection point: a chance to back a company's evolution into a focused defense powerhouse, with the potential for both operational excellence and valuation re-rating. The time to act is now, ahead of what could be a defining milestone in Rheinmetall's journey.