Elbit to acquire IMI Systems next week for NIS 1.9b

IMI Systems rocket Photo: PR
IMI Systems rocket Photo: PR

The merger with IMI will give Elbit Systems a foothold in precision rockets, cruise missiles, and active protection for tanks and AFVs.

Next week, according to the most up-to-date assessment in the Ministry of Finance, Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT), controlled by businessperson Michael Federmann, will officially acquire IMI Systems Ltd. (IMI) from the state for NIS 1.9 billion.

Elbit Systems has stubbornly pursued the acquisition of IMI for three years, while other companies in Israel and overseas withdrew, one by one, from the tender conducted by the state. Some of them withdrew angrily because of "problems with the propriety of the proceeding," while others simply lost interest along the way.

Even without the "unfortunate slip of the tongue" by former Government Companies Authority director Ori Yogev, who said that the Ministry of Defense was pressuring Elbit Systems to put a high price on IMI so that it would buy it, and not without a promise that it would take care of Elbit Systems with "things on the side," the process features allegations of favoritism by the state towards Elbit Systems as the new owner of IMI. Both of the parties involved declared on various occasions that these allegations were groundless.

Either deliberately or by accident (it is unclear which), during a week in which Elbit Systems will celebrate its acquisition of IMI, the Knesset State Control Committee, chaired by MK Shelly Yachimovich (Zionist Union) will convene for a follow-up discussion of a report published three and a half months ago by the State Comptroller about defects in the privatization process.

It is very doubtful whether the Control Committee's discussion will change anything in the already completed process. All that remain are a few last documents linked to it that are now in the stages of being written and polished by lawyers. At the same time, Elbit Systems has already approved a $700,000 bonus for president and CEO Bezhalel Machlis, for which the IMI acquisition is one of the reasons.

1. IMI fits Elbit Systems like a glove

How will Elbit Systems look after the merger with IMI? Leading defense industry figures portraying the post-merger company foresee a company with a highly developed and reinforced marketing system selling attractive packages of end-to-end defense solutions to the world's armies.

Elbit Systems marked IMI years ago as having activity that is synergetic to it and fits it like a glove, even if it requires expansion here and improvement there.

There is already scarcely a Western air force updating its unmanned air system or an army upgrading its communications, command, and control infrastructure that does not summon Elbit Systems' marketing and sales personnel for an intimate chat. Elbit Systems is aware of its status, and wants to significantly expand its portfolio of products and become a defense supermarket in which mega-deals can be made.

The merger with IMI will give Elbit Systems a foothold in spheres it has previously only dreamed about, such as precision rockets and cruise missiles, promising activity in active protection for tanks and AFVs, involvement in 30% of all of the IDF's Merkava tanks and Namer AFVs, precision artillery shells, upgrading of tanks and AFVs, armoring and weapons stations, manufacturing of armored vehicles, etc.

As if that were not enough, IMI also manufactures light ammunition for the IDF and foreign armies, and has turned to additional markets in recent years. IMI has founded a line of premium products, including specially designed ammunition for special forces and types of ammunition adapted to the caprices of the US civilian market, known for its taste for weapons. For environmentally aware shooters, it is making "environmentally friendly ammunition," which the manufacturer claims emits less poison gas. It will be interesting to see what Elbit Systems does with this.

2. They will go over the books with a fine-tooth comb

The financial information about IMI currently available to Elbit Systems was taken from the information rooms opened by the company in the framework of its privatization process. Only after the deal is completed will Elbit System delve deeply into IMI's books, and it cannot be ruled out that it will find both pleasant and unpleasant surprises.

The merger process is likely to be slow and lengthy. Its first months will be spent on thorough study of the company's activity. Teams of lawyers, accountants, and economists will analyze all of the activity, go over the numbers with a fine-tooth comb, price every screw, and assess everything on a cost-benefit basis. It is believed that the headquarters and marketing setups will be merged, and also overlapping activities at a later stage.

It will be interesting to see what Elbit Systems, which developed a series of advanced products for protecting airliners and helicopters against shoulder-fired missiles with a laser, will do with "Red Sky," a similar system developed by IMI. In general, activities found to be unprofitable or without added value will be closed down or sold.

IMI's 2,700 employees will become employees of Elbit Systems overnight. With the new owners and attractive retirement terms arranged for any of them wishing to retire at a later stage, they can breathe freely while absorbing the fact that the days in which their salaries were paid late and company managers went to Jerusalem in order ask the state for loans have ended.

A significant challenge for Elbit Systems' personnel team will be to make this transition a smooth one, while enhancing the common values of the two companies' workers, without ignoring the gaps between their organizational cultures.

Elbit Systems has already acquired experience and confidence in its mergers and acquisitions. Among other things, it acquired Tadiran Communications and Elisra Group in 2005 and Soltam in 2010. "They were all like unpolished diamonds. Sometimes the polishing took time, but each of these companies was a growth engine for the group," says a defense industry executive.

Meanwhile, the forecasts are encouraging. The Ministry of Defense recently gave IMI an order for precision rockets amounting to several million shekels, and will continue to provide additional orders as part of the establishment of a missile corps promoted by Minister of Defense Avigdor Liberman and IDF Chief of Staff Gadi Eizenkot.

Liberman's plan involves spending NIS 7-8 billion on buying missiles over 10 years, mainly from IMI. Who says that patience doesn't pay?

3. Tough competition at home and worldwide

Following the merger, the Israeli defense market will be controlled by three main companies: Elbit Systems-IMI and two government companies: Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1) and Rafael Advanced Defense Systems Ltd..

Those looking for order and logic in the sector are inclined to pigeonhole IAI as a company oriented to UAVs, satellites, airplanes, and missiles. Rafael is regarded as a company whose core business is advanced missiles, active defense systems, and systems for intercepting rockets and missiles. The newly expanded Elbit Systems works in land-based systems and many other activities that have made it what it is today.

According to some assessments, this merger will intensify the already fierce competition between the Israeli companies in the international markets, which is accompanied by scandals and embarrassments.

One source of unavoidable friction will the competition between Rafael and Elbit Systems over sale of protective systems for tanks and AFVs. This friction is liable to give off dangerous sparks, given the two companies' ambition to sell large quantities of special systems that provide tanks maneuvering on the battlefield with protection against anti-tank RPG missiles and rockets.

IMI and Rafael are enthusiastically pushing contracts to sell their defense systems to the US army, and not without making derogatory comments about each other. Rafael's managers have no doubt that their representatives will encounter Elbit Systems' marketing representatives in future tenders, and it is doubtful whether anyone can guarantee that unnecessary conflicts between the parties will not arise.

As if that were not enough, the merged company will begin manufacturing a new generation of products based on the two companies' shared know-how. Defense market sources say that the new generation will account for 15% of annual sales.

Rafael, however, is not sitting idly by. After the objections it expressed to the sale of IMI to Elbit Systems were rejected, it has been making preparations for the future and is trying to establish itself in a new market in which it has not operated before: tactical UAVs and loitering munitions.

The recent offer by Rafael and businessperson Avichai Stolero to acquire UAV company Aeronautics Ltd. (TASE:ARCS) reflects Rafael's aspirations for this market. If it does not acquire Aeronautics, it will try to acquire another company in the sector.

Elbit Systems and IAI are dominant in the global UAV and loitering munitions market and are competing fiercely in it. Now a new Israeli player is likely to enter it and try to grab a share of the market. "It will be a nervous, frantic, and driven market. I hope these companies are wise enough to keep their dirty laundry at home. Up until now, they have not earned high marks on items relating to maintaining a competitive atmosphere," says a senior defense executive.

4. Moving to the south and NIS 2 billion

Elbit Systems will adhere to the timetables stipulated in the plan for moving IMI's activity in Ramat Hasharon to Ramat Beka in the Negev by 2022. The incentive is the reimbursement promised by the state for its actual expenses in vacating the old site and building the new one.

Under the sale agreement for IMI, the state did not leave the move to the Negev to the buyer's judgment; it set clear timetables for implementation of the move to Ramat Beka. In exchange, the buyer is credited for the expenses incurred in the move after it is carried out. The defense industries believe that Elbit Systems' expenses in the move will amount to NIS 2 billion, which it will receive when the move to the Negev is completed.

The new site at Ramat Beka will be built in a place already used as a testing field by IMI. The new production facilities will be built from scratch on a huge 52,000-dunam (13,000-acre) site, while renewing and upgrading the production systems.

For the upcoming move to the Negev, Elbit Systems contracted with former IDF Deputy Chief of Staff Maj. Gen. (res.) Yair Naveh, who will lead the difficult project on its behalf.

The previous encounter between Naveh and IMI was in 2013, when then-Minister of Defense Moshe Ya'alon appointed him chairperson of the company. The committee for examining senior appointments in government companies disqualified him. The reason was that Naveh had not been officially released from the IDF at the time, and the committee found a conflict of interest in this. Naveh refused to be released from the IDF, even in order to head IMI's board of directors, so that he could later compete for the position of IDF chief of staff.

With the completion of the move and vacating of the Ramat Hasharon site, Elbit Systems-IMI will deliver 6,000 dunam (1,500 acres) to the state on which 40,000 housing units can be built.

The land, which has been polluted over the years in the course of IMI's intensive manufacturing activity, will require thorough purification at the cost of more millions of shekels.

Published by Globes, Israel business news - en.globes.co.il - on November 6, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

IMI Systems rocket Photo: PR
IMI Systems rocket Photo: PR
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