Three people with knowledge of the matter have confirmed that Carlyle, a private equity firm, and KfW, a German development bank, are in discussions to buy the majority of Thyssenkrupp’s submarine unit. This is the latest indication of how the Ukraine conflict has reshaped Europe’s defence industry.

Berlin's desire to maintain control of what it believes to be important military technology is reflected in the plan to combine forces and acquire a majority stake at Thyssenkrupp.

The people reported that all three parties were in talks over a deal which would give Carlyle a majority share of TKMS while the state-owned lender KfW holds a minority blocking stake. They said that Thyssenkrupp will own a small minority stake.

Carlyle & KfW declined comment.

Thyssenkrupp has a dual-track procedure for TKMS that could lead to a spin-off or sale of the division which makes submarines and frigates, as well as sensor technology and minehunting.

The deal would mark a significant step in Miguel Lopez's attempts to untangle Thyssenkrupp, a sprawling conglomerate that is currently selling a stake of its steel unit to Czech billionaire Daniel Kretinsky.

Sources familiar with the matter say that KfW completed its preliminary review of a potential deal. It is now preparing an in-depth assessment of the asset. This could result in a valuation of between 1.2 billion and 1.6 billion euro ($1.3-$1.7billion) as part of a 2-stage process.

Berlin is in principle willing to invest in TKMS through KfW, but it needs more information about the business strategy of this division. A senior government source stated that "we won't purchase blindly".

Separately Carlyle has also been conducting due diligence on TKMS over the last few months. It confirmed its interest to Thyssenkrupp’s supervisory board in a letter sent last month, in which it requested more detailed discussions.

People said that both Carlyle's and KfW's delegations visited TKMS sites on German soil to continue negotiations.

Two people have said that if all parties align, an agreement could be reached by September, which is the end of Thyssenkrupp’s fiscal year.

SECTOR CONSOLIDATION

The people stated that no decisions had been taken and the talks could be postponed or break down due to possible differences in valuation or other conditions.

A spokesperson from Thyssenkrupp confirmed that the company was running a two-track process in relation to TKMS, and was also in discussions with Carlyle as well as the German government.

The efforts to sell TKMS are a reflection of a shift in Europe's defense policy following the Russian war in Ukraine. This has given momentum for possible consolidation in a traditionally national-dominated sector.

A sale of TKMS would be a first step in creating a platform for consolidation that could pave the path for future pan-European tie ups or mergers, something executives within the industry have been advocating for years.

Pierroberto Fogiero, CEO of Italy's Fincantieri which has a partnership with TKMS already, said that the company was interested in a partnership.

The CEO Lopez stated this week that TKMS is still in the process of being acquired. TKMS employs 7,880 people and accounted last year for 11,4% of Thyssenkrupp's adjusted EBIT, which was 703 million euro.

He said, "We are further along than we have ever been."

The people who spoke to the media said that unlike a spin-off a sale doesn't require approval by the annual general meeting of Thyssenkrupp, making it a more straightforward option.

The union IG Metall has been involved in the TKMS process and had talks with Carlyle at the end of last month. Its goal is to reach a fair and best owner agreement that protects sites and jobs.

IG Metall has clashed with management in the sale process of Thyssenkrupp’s steel unit.