IAI privatization overcomes major hurdle

IAI T-Heron Photo: IAI

The ministerial privatization committee will meet next week to approve a plan for an equity offering by Israel Aerospace Industries.

Agreement has been reached on an outline plan for the privatization of Israel Aerospace Industries (IAI). Government sources say that the first stage on the road to an offering of the company's shares will get underway next week when the ministerial privatization committee convenes to approve the wording of the decision that has been formulated. After the outline plan is approved, negotiations will officially start between the state and IAI's management, headed by its chairman Harel Locker, and the company's employees. The aim is to achieve a signed labor agreement within three months that among other things will set out what the employees will receive in the share offering.

Yair Katz, chairman of the IAI workers committee, informed workers' representatives yesterday of progress in contacts with the state, and received their agreement to open negotiations. This was on the understanding that the IAI's management had retracted its decision on dismissing hundreds of employees in the company's Aviation Group, its civilian aircraft division.

The latest development represents significant progress in a process that the state has been trying to move forward for more than two decades. As soon as the ministerial privatization committee gives its approval, the offering process can begin and can progress independently, managed by the Government Companies Authority.

Initially, the state intends to offer to the public 25% of the shares in IAI at a NIS 12 billion company valuation. The chairman of the ministerial privatization committee, Minister for Cyber and National Digital Matters David Amsalem, will decide the date on which the committee will meet next week. According to sources involved in the process, the wording of the decision to be brought before the ministerial committee will allow the sale of up to 35% of the company through a public offering on the Tel Aviv Stock Exchange. The Government Companies Authority, headed by Yaakov Kvint, will set the terms of the offering.

Solution for excess salary payments

The formulation of an outline plan for privatization of IAI became possible after solutions were found for the two main obstacles that have delayed the process. The first is the objection of the Commissioner of Wages in the Ministry of Finance, who demanded that IAI employees should repay excess salary payments they had received. The other is the objection of defense officials, who were concerned that the company's reporting obligations once it became publicly traded would endanger security interests.

Sources inform "Globes" that after intervention by Minister of Finance Israel Katz, the Commissioner of Wages agreed that a settlement would be found for the matter of excess salary payments without the employees having to pay back money to the state. On the security issue, it was decided, after intervention by Minister of Defense Benny Gantz, that before the offering the Knesset would legislate an ordinance preserving vital security interests of the state in IAI and its Elta subsidiary. The ordinance will be stricter than those enacted in similar cases in the past (the privatizations of Bezeq and El Al), and will affect the ownership structure of the company, its board of directors, and company officers.

On the basis of an opinion from the Attorney General, the state will be able to ask the court for privilege in any case in which concern arises that IAI's disclosure obligations might endanger Israel's vital security and strategic interests.

In the past, IAI's employees demanded 2.5% of the company's shares at a 30% discount. This would mean a benefit of NIS 90 million, of NIS 6,000 for each of IAI's 15,000 employees. IAI suffers from outdated labor agreements and high compensation expenses in comparison with its competitor Rafael Advanced Defense Systems Ltd.. The worst problems are in the Aviation Group, which the IAI board had decided to downsize, shedding hundreds of jobs, but the equity offering, which will strengthen IAI's shareholders' equity, will render extensive downsizing unnecessary for the time being.

IAI provides products and services in aviation and space to the military and civilian markets. In 2019, its revenue totalled $4.1 billion, and 74% of its sales were exports. The company suffers from low profitability, although in 2019 it switched from a loss to an operating profit of $120 million. The privatization process as outlined follows the model of privatizations of aerospace and defense companies in Europe since the 1980s.

Published by Globes, Israel business news - en.globes.co.il - on September 24, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

IAI T-Heron Photo: IAI
IAI T-Heron Photo: IAI
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