Israel Plans To Merge IMI, Rafael

In yet another industrial-policy zigzag, Israeli trade, finance and labor leaders last week jettisoned plans to privatize Israel Military Industries (IMI) and now intend to merge it with another state-owned company, Rafael. Official notice of the proposed merger came in a joint Jan. 20 statement by Defense Minister Ehud Barak, Finance Minister Yuval Steinitz and Histadrut Secretary-General Ofer Eini. Under the plan, debt-saddled IMI would first become a wholly owned subsidiary of Rafael, which netted some $120 million in profit last year on sales of more than $2 billion. Included in the deal would be IMI business units, including its Givon rocket division, the Maltam advanced systems division and the Slavin armor and upgrade division.

The decision to merge with Rafael, rather than Israel Aerospace Industries (IAI), the second-largest state-owned defense concern, followed "deep discussions" by Ministry of Defense and Treasury professionals and was based on "economic, security and other considerations regarding employees," the statement said.
Barak and Steinitz said they will meet in the next two weeks with management and board members of IAI, Rafael and IMI to hear concerns and presentations before bringing their proposed merger up for Cabinet approval.
If the government approves, the merger will be implemented by government officials and leaders from the government's umbrella labor union, the statement said.
Rafael supports the proposed merger in principle, although executives cautioned that myriad details must be resolved through negotiation, including assumed responsibility for IMI debt, pension obligations and the size of the work force that it must absorb.
"Principally, we're in favor on professional, economic and national grounds, and look forward to reviewing detailed information," said Rafael spokesman Amit Zimmer.

Critics Take Aim

But executives from IMI, IAI, Elbit Systems and Plasan Sasa, a privately held firm with designs on the Givon armor and upgrade division, were less pleased, according to industry sources who declined to be quoted as openly challenging both ministers, Eini, the labor union chief, and the head of Israel's Government Companies Authority.
"It's a very problematic decision, tainted by nonprofessional considerations, and done in a way that did not truly involve the in-depth staff work claimed by Barak and Steinitz," said one senior industry executive. "For almost two years, MoD and the Treasury were working diligently to go public, and now all of a sudden - after four meetings - they switch to merger with Rafael. On what basis? Where's the transparency?"
Sources suggested that political and personal considerations heavily influenced the proposed plan. Among the extraneous considerations cited were ongoing tensions between MoD and IAI over export policy and other issues, and reluctance by Steinitz, a member of Israel's Likud Party, to strengthen the political standing of Haim Katz, a rival party member, lawmaker and IAI labor leader who wields influence over some 15,000 registered Likud voters.
When asked to respond to such criticism, spokesmen for Steinitz and MoD declined comment beyond information contained in a Jan. 20 joint statement.
IAI officials said they look forward to presenting additional financial, business and other data in coming weeks that may alter last week's decision.
"IAI intends to express very strongly its concerns about competitiveness, economic justification, fairness and the larger and more important interest of the nation. Given our considerable cash flow, backlog, solid financials and the transparency with which we conduct business, we're quite optimistic that we haven't yet heard the last word on a decision with such grave impact on Israel's defense industrial base," a senior IAI executive said Jan. 21.
Meanwhile, Elbit and Plasan Sasa - two private and high-performing firms - also intend to weigh in.
Plasan Chief Executive Dan Ziv last week offered to purchase IMI's Slavin armor and upgrade division for slightly less than $100 million.
One senior industry executive said the privately held armor provider, whose annual sales grew from $150 million to nearly $600 million in the past four years, "has enough cash to make an actual acquisition; and not the bookkeeping maneuver that has been proposed. The company will grow through acquisitions, and the government of Israel needs to ask itself if it wants to reap benefits from an actual sale, or see us go to the United States, which in any case is our central market."
Similarly, Elbit's longtime chief executive Yossi Ackerman has repeatedly expressed interest in acquiring synergistic, state-owned assets such as IMI's Slavin unit.
When asked last week about his interest in getting involved in the pending merger, Ackerman said, "It's such a hot-button issue that the less said the better. We're hoping that wisdom will prevail, and that ultimately, the decisions made will be in the best interests of the state."

Historical Wavering

The proposed merger is the latest in more than a decade of failed or partially implemented attempts to rid bloat, reduce redundancies and inject greater efficiency in Israel's state-owned defense and aerospace sector, whose 40,000-plus employees cannot be sustained by defense spending or realistic export projections.
In the late 1990s through early 2001, leaders here spoke about a mega-merger of Israel's three state-owned firms - IAI, IMI and Rafael - into a consolidated powerhouse notionally dubbed Israel Defense Industries Ltd. A few years later, Amos Yaron, then MoD director-general, designated 2005 as the year when IMI would be "almost completely privatized" along with nonstrategic parts of IAI.
Under agreements in principle at the time, MoD planned to sell IMI's Givon Rocket Systems and Maltam Advanced Systems divisions to Rafael; with privately owned, publicly traded Elbit Systems the preferred buyer for the Slavin armor and upgrade division. Those plans were scuttled by ongoing labor disputes, political distractions and bureaucratic inertia.
Since 2008, the MoD and the Israeli Treasury had been preparing an initial public offering to prepare IMI for privatization. Just two months ago, Barak described the firm as a "central anchor in defense capabilities" with a bright future ahead of it.
During a November visit to IMI headquarters north of Tel Aviv, Barak said, "They produce here today not only ammunition, but also parts of the most advanced weaponry and systems in the world. … I think IMI can be proud of its capabilities, and alongside the challenges and problems that we have imposed on them, we can pave their way for a company that can stand on its own feet in a stable environment for the long term."
The latest proposal represents a desire to halt the billions of shekels in annual bailouts needed to sustain IMI's excessive work force and pension commitments, government sources said. Despite IMI's sale in recent years of four noncore business units, an impressive post-Lebanon War product portfolio and growing sales, IMI officials said onerous financial burdens from the past still hobble bottom-line efficiency.
"We begin each year with a half-billion shekel [$140 million] handicap, given the pensions, work force agreements and activities assigned to us for national strategic purposes," an IMI source said. "Even Elbit would have a hard time if saddled with similar burdens."