There are major differences between the Ministry of Defense's stance and that of the Government Companies Authority and the Ministry of Finance concerning the state's plan to offer at least 25% of the shares in Israel Aerospace Industries (IAI) to the public and bring the measure to the cabinet for approval in ten days. The Ministry of Defense has a comprehensive study commissioned from consultants PwC that rates the planned offering low on the list of options suitable for IAI, sources inform "Globes."
The study considers the question of whether IAI will benefit from an IPO. The company is currently completely controlled by the state.
PwC weighed an offering of a minority of IAI's shares against alternatives, such as bringing in a strategic investor, a merger with Rafael, splitting plants and activities off from IAI, and offering shares in the company exclusively to investment institutions.
"According to the report, offering a minority of shares in IAI will not achieve the goals sought by the company's management, and will not facilitate far-reaching regulatory concessions, because even after the IPO, it will still be a government company," a source who read PwC's report said. The substantial regulatory concessions that IAI will receive constitute some of the conditions set by the company workers' committee for supporting an IPO.
"Locker is whispering in Netanyahu's ear"
Behind closed doors, defense sources express amazement at the urgency with which Prime Minister and Minister of Defense Benjamin Netanyahu is pushing ahead with the IPO now, during the term of a transition government. "You don't do such things at a time like this. What's their rush?", one source wondered. "The offering isn't ready, and the alternatives haven't been examined in all their aspects, but IAI's management and workers are dreaming of regulatory concessions, the government sees billions of shekels coming, and the workers see the tens of millions that they will get. Everyone is divvying up chickens that have yet to be hatched."
These sources assert that Director of Security of the Defense Establishment (Malmab) Nir Ben-Moshe also "has unanswered questions about the state's strategic assets in IAI. In principle, it isn't clear how leaks of sensitive information during the process of opening the company up to examination can be prevented." During his term as minister of defense, MK Avigdor Liberman (Yisrael Beitenu) ordered the freezing of measures for the IAI offering because of the objections raised by Ben-Moshe. The discussions about the company's IPO were renewed only after Liberman resigned and Netanyahu became minister of defense.
A source familiar with the IPO proceedings said, "The prime minister is exerting heavy pressure to go ahead with the offering. IAI chairman Harel Locker is whispering in his ear, and Netanyahu is pressing all of the professional staff to expedite the move."
There is an open channel of communications between Locker and Netanyahu, who know each other well from when Locker was director general of the Prime Minister's Office. A well-informed source commented, "If the prime minister says that the matter is urgent, everyone can take his cue from it, not to mention that the planned IPO is the implementation of a cabinet decision taken in 2014."
Who will get the money from the IPO
A meeting of Ministry of Defense director general Maj. Gen. (res.) Udi Adam with Netanyahu about the planned offering was scheduled for last Thursday, but was called off at the last minute. It is unclear whether a new date for the meeting was set. The offices of Adam and Netanyahu declined to comment on the matter.
Despite the objections by the Ministry of Defense, the Government Companies Authority is promoting the IPO, together with Netanyahu and IAI management. The Government Companies Authority regards the IPO as a tool that will make it possible to raise NIS 3-4 billion if it takes place at a NIS 12 billion company valuation. This sum will be used to pay for an increase in the IDF's budget for the coming years.
According to Ministry of Finance sources, however, the offering is aimed at strengthening IAI and preventing stagnation in the company, such as happened at IMI Systems before it was privatized and sold to Elbit Systems.
"Even more important than the money that the state will get, the offering will prevent a situation leading to IAI's collapse. Even the Ministry of Defense is so alarmed about the company's situation that it is allowing Rafael Advanced Defense Systems, IAI's competitor, to enter the satellites sector in order to safeguard capabilities in it, even if IAI gets into trouble. The IPO is definitely not an event aimed at getting more money for the state. Once trading in the company's stock begins, there will be more commitment, and IAI will operate as a commercial company in all respects. The state will also profit from this in the long term," a senior source argued.
While the Ministry of Defense is adhering to PwC's report, the Government Companies Authority has a report prepared for it by consultants McKinsey & Co. stating that an offering of a minority of shares in IAI is the right step at the right time.
The sources advocating the IPO believe that there is nothing wrong with going ahead with it during a transitional government's term, especially when the professional staff involved have been working intensively on the IPO for the past 18 months. "The concern by the defense sources about the timetables set is perplexing, because the measure originates with the company and responds to a need," one of the sources explained. "By the time the ministerial privatization committee holds its discussion, we will sew things up with the Ministry of Defense, which we understand is committed to this process."
Sources in the Prime Minister's Office commented, "In pursuance of the 2014 government decision and many discussions with professional staff and in the ministerial committee, an orderly professional process on the matter is taking place. For the good of the process, the government was aided by some of the leading consultant firms in Israel and worldwide. All of the relevant options are being seriously examined and weighed, as are the positions of the defense agencies."
The Ministry of Defense said, "Privatizing IAI is an important and difficult action with major defense and economic consequences. The Ministry of Defense has accordingly been conducting a thorough and orderly examination of the issues involved for some time, in full cooperation with all of the relevant professional parties."
IAI said, "Access to the capital market is essential for a commercial company on this scale. The company's bonds have been traded, and it has been reported to the stock market, since 2007, and has raised an aggregate NIS 3.1 billion in four bond issues. The capital raised in an IPO for a 25% minority of the company's shares will be used for the company's growth via research and development for the next generation of technological products in the coming decades, in response to the growing competition in the sector.
"Control of the company will not change, because only a 25% minority of its shares is being offered. The difference between the IPO and IAI's bonds that are now traded is a saving of tens of millions of shekels a year in interest and greater transparency in and appropriate measurement of IAI's business performance. The company therefore regards raising capital cheaply through an offering of a minority of its shares, without surrendering the Ministry of Defense's control of IAI, as very important."
Published by Globes, Israel business news - en.globes.co.il - on November 4, 2019
© Copyright of Globes Publisher Itonut (1983) Ltd. 2019