Tawazun, the Abu Dhabi-based defence group, has signed an agreement to buy a controlling stake in Al Jaber Land Systems.
The deal will create a new defence entity in the UAE, to be named Jobaria Defence Systems, to operate within the military defence market as a supplier of modern weapons systems "with a key focus on design, development, upgrade and support service programmes", according to a statement from Tawazun.
Al Jaber Land Systems designs and manufactures vehicle and vehicle systems in Abu Dhabi for use by the UAE Armed Forces.
"The two companies [Tawazun and Al Jaber] are currently working together to finalise the agreement under which the new partnership will be created," the statement said.
Spokesmen for the two groups would not comment further on the planned deal, but it is believed more details will be announced at the Idex defence exhibition in Abu Dhabi next week. No estimate for the value of the transaction is yet available.
Tawazun and Al Jaber already have a joint venture in the form of Burkan Munitions Systems, which manufactures and assembles ordnance for infantry, artillery and aircraft. Burkan is also building an environmentally friendly plant for the decommissioning of explosives and ammunition, expected to be completed next year.
Al Jaber is a diversified holding company with interests in construction, lifting equipment, logistics, industry and training.
It has been in restructuring talks with its bankers for more than a year concerning billions of dollars' worth of debts arising from the downturn in activity and asset values during the global financial crisis.
A source close to the restructuring talks, who asked not to be identified because the negotiations were confidential, said that the deal with Tawazun was not directly connected with the restructuring.
He said Al Jaber had been looking at which parts of the conglomerate were "non-core" to its main activities in construction, and that the defence business was regarded as "non-essential".
"Any cash generated will go to Al Jaber, so it will be positive for the restructuring, but the deal [with Tamazun] was not driven by the restructuring process," he added.
The restructuring was still being worked on, and the company was aiming to get term sheets to lenders by the end of this month, but there was no guarantee this timetable would be met.
Al Jaber employs 60,000 people, mainly in the Middle East, and has a total asset base of Dh18 billion (US$4.9bn).