The European defense industry is growing rapidly, but its structural fragmentation remains the main obstacle to competitiveness. According to an analysis by Scope Ratings, the gap with the United States cannot be closed by increasing budgets: European spending on military R&D amounts to around 13 billion euros compared to 138 billion in America, and EU countries manage over 170 weapon systems compared to 40 in the USA, with three parallel programs for fighter aircraft against American standardization on the F-35. The annual cost of “non-consolidation” is estimated by the European Parliament between 18 and 57 billion euros, due to duplications in procurement and lost innovation capacity.
Consolidation is progressing, but slowly
Something is moving: European defense M&A reached $2.3 billion in H1 2025, more than all of 2024, with backlog orders at €330 billion at the end of 2024. Rheinmetall has pursued vertical integration with acquisitions of Loc Performance and Naval Vessels Lürssen, while Airbus, Thales and Leonardo have agreed to merge satellite divisions into Project Bromo. However, Scope warns that without clearer EU merger regulation (expected by the end of 2026 at the earliest) transactions will be mostly incremental. Venture capital funds targeting European defense grew by 24% to 5.2 billion in 2024, creating a pool of potential technology targets.
Who can do M&A
Among large contractors, Safran, Airbus and Rolls-Royce show the greatest theoretical M&A capacity in absolute terms, but much of their financial strength can be traced back to civil aerospace. Among pure defense players, BAE Systems and Rheinmetall are better positioned, with the latter continuing to expand its capacity thanks to rapid EBITDA growth. HENSOLDT, however, is at the opposite extreme: the high gross leverage makes it more credibly a consolidation target than a buyer.
Structural risks
Stock market valuations – with EV/EBITDA multiples over 20x compared to 13x in 2021 – make debt-financed deals expensive. State shareholdings also complicate cross-border operations: the MEF holds around 30% of Leonardo, France has strategic influence over Thales, Spain 28% of Indra. The FCAS program, halted due to tensions between France, Germany and Spain, illustrates how national interests can block even shared strategic objectives. Finally, a long-term risk, according to Scope, is that demand will decline if the current geopolitical urgency eases with peace in Ukraine or the Middle East.
