Israel's Aurelius, German state to take over VW's Osnabrueck plant for defence projects

FRANKFURT/OSNABRUECK, Germany, Sept 7 (Reuters) - Israeli investor Aurelius Capital and the German state of Lower Saxony are planning to take over one of Volkswagen's German auto factories to repurpose it for defence projects, Europe's largest carmaker said on Monday.

Plagued by overcapacity and high costs, Volkswagen has for months been in discussion with stakeholders over the factory in Osnabrueck, where auto production will be phased out in 2027, with defence production having become a real alternative.

The deal comes only days after Volkswagen agreed on its biggest-ever turnaround that could result in the closure or repurposing of other German sites, hit hard by a weakening European market, high labour costs and Chinese competition.

Rising demand for defence assets is seen as one of the main solutions for how European automotive firms can tackle the issue of excess capacity, also reflected by with Rheinmetall and Continental both having made efforts.

The joint statement of intent signed on Monday would see Aurelius take over the factory together with Lower Saxony, which is Volkswagen's second-largest shareholder, while the Israeli investor would become a majority-owner.

No further details were disclosed for the plans, which still need to be finalised.

Volkswagen said an initial "anchor project" for Osnabrueck would be a cooperation with Israel's Rafael Advanced Defense Systems, confirming what sources told Reuters in May.

"These plans involve the potential manufacture of systems and components for air defense systems for Germany and Europe," Volkswagen said, adding the cooperation would pave the way for further such deals.

(Reporting by Christoph Steitz and Christina Amann, Editing by Friederike Heine)