IDF procurement focuses too much on Elbit

IMI rocket  photo: PR

IMI Systems' new missile deals are falling into the hands of its new owner, Elbit Systems, jeopardizing the future of Israel Aerospace Industries and Rafael.

1.

They call it the "IMI deal." The Ministry of Defense buys from IMI Systems Ltd. (formerly Israel Military Industries). With all due respect to IMI's development and leadership, what is really involved is a deal between Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT), the IDF, and the Ministry of Defense. Although the sale procedure for IMI to Elbit Systems, which was approved at all the political and economic levels before it was signed and is still in the stages of bureaucratic closing, calling it an IMI deal is justifiably designed to boost the egos of the company's managers, headed by president and CEO Avi Felder, and its employees, who even in the tough years, when the company was on the verge of being sold or closed down, focused on its future growth engines. These include rockets and tank shells, for example, special precise air-to-ground bombs suitable for urban warfare, special tank shells, and mortar shells. Calling it an IMI deal also covers up the fact that Elbit Systems is slowly becoming the local defense monopoly (even though the deal was approved by the Antitrust Authority).

Was this deal a surprise? Did the previous candidates for the acquisition of IMI, some of them especially well-known figures, not know that it was in the processes of practical examination for approval? How did it happen that this did not increase the price that they offered, and they nevertheless withdrew? The answer is that this acquisition has been spoken of for three years in the Ministry of Defense, in the army, and in the defense industries, in Israel and all over the world. Anyone who wanted to know, who tried to find out, who sought the help of experts (ex-army people?), people familiar with such matters, could have known.

Elbit Systems, which emerged throughout as the buyer preferred by the privatizers in the Ministry of Finance and the Ministry of Defense, knew more - possible more than Samy Katsav and Meir Shamir, possibly more than Ira Rennert, or like Flextronics knew, but was unable to continue in the process for its own reasons.

2.

Why were the former candidates nonetheless surprised, if not by the signing of the deal, then by the heavy price that it will bring over the years? Possible answer: 1. Quite of a few of the candidates, 5-6 groups that began the process and some of which reached the information rooms, encountered chopped information - incomplete data. This was the proof of their assertion that they constituted merely window dressing for a guided sale to Elbit Systems led by then-Government Companies Authority director general Ori Yogev with his friends in the Ministry of Defense and the Ministry of Finance. Let it be noted that the salespeople from the state and from IMI say that everything was shown to everyone equally, that there were tours of the plants, that the disclosure of information was equal for all without preferences.

It is possible that the attitude of most of the candidates at the time was shaped primarily by financial considerations: how much it was worth, how much should be paid, and when they would begin seeing signs of a return or a dividend. If that was the case, there was not then, and still is not, anything attractive about IMI. The groups concentrated on accounting. They recruited an army of accountants, lawyers, and economists, not people from the defense industry with an inside knowledge of these matters, or if you like, high-level wheeler-dealers who come and go in the right corridors and have connections in the army the defense industries, and the Ministry of Defense. In contrast, Elbit Systems is an integral part of the "group" in question that knows those who should know what should be checked, what is taken into account, and what is in the pipeline. Elbit System not only has money; it is said in the industries that it thought about the benefit of synergy. To its credit, it should be said that it did not settle for that. It also worked closely with defense experts and sent more managers on tours of plants, accompanied by technical professionals.

Does this deal increase concern about future over-concentration in local defense procurement as a result of Elbit Systems' acquisition of IMI? The answer is a flat yes.

3.

The missiles deal is worth several hundred million shekels, and that is only the start. In the coming years, there will be more follow-on deals, either for similar or larger amounts. Within a decade, according to the vision of the "missiles and rockets corps" that Minister of Defense Avigdor Liberman and IDF Chief of Staff Gadi Eizenkot are trying to establish, a total of NIS 7-8 billion will be invested.

This involves procurement of rockets with ranges of 30-150 kilometers, some of which have already been developed and are being manufactured at IMI and some of which are in the development stages. These rockets will improve the IDF's long-range fire capability, while reducing the land forces dependence on the long arm of the air force.

Despite the smoke bombs that the Ministry of Defense is letting off on the scale of the missiles deal and the follow-on deals, the missiles and rockets program is making the acquisition of IMI especially worthwhile for Michael Federmann and his company, Elbit Systems: billions of shekels that are already making their way to Elbit Systems are likely to substantially bolster its power and consolidate its foothold in the IDF land forces. It will enhance new missile and rocket capabilities in a way that will enable Elbit Systems to compete with government companies Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1) and Rafael Advanced Defense Systems Ltd. in this matters.

4.

From the beginning, Rafael and IAI did not like the deal surreptitiously cooked up at the Ministry of Defense. They also did not like the merger taking shape in the local defense market with Elbit Systems' acquisition of IMI.

IAI and Rafael have large-scale operations in missiles and rocket propulsion, which they regard as one of their main growth engines. The two companies warned six months ago in the framework of a comprehensive analysis on the subject in "Globes" of the enormous power that Elbit Systems would accumulate: "Procurement of billions of shekels of rockets from IMI-Elbit Systems is making the entire IMI acquisition deal not only very worthwhile, but the realization of a rosy dream. It's like winning the lottery," a defense source said.

Another source warned, "If Elbit Systems starts playing with rockets and missiles reaching ranges of 150 kilometers and perhaps double that, it will have no problems in later making adjustments in them that will turn them into air-to-ground missiles and sea-to-ground missiles, and IAI and Rafael will then have a problem. The concern that IAI and Rafael are raising is understandable - Elbit Systems is about to get a foothold in places where as of now it does not have one."

5.

In the past year, however, Elbit Systems obtained from the Ministry of Defense the tender for developing and manufacturing the IDF's future self-propelled artillery to be produced in Elbit Systems' plant in Yokneam (formerly Soltam). Controversially, the Ministry of Defense chose to give Elbit Systems the status of a lone supplier in the framework of this program, in other words without publishing a tender or holding a competitive proceeding in the matter. The Ministry of Defense did not even bother to explain its considerations in them matter; it took care in its responses to say that the decisions had been taken legally according to secret considerations.

Both the recent missile deal and those to come are again taking place without a tender, with Elbit Systems being the sole supplier. The other companies are enraged. A defense source said soothingly, "Their turn will come," and other sources close to Elbit Systems are asserting that IAI and Rafael also benefited for years from supplying products and systems to the IDF as sole suppliers - i.e. the value of UAV systems, Iron Dome, and Arrow missiles.

Published by Globes [online], Israel business news - www.globes-online.com - on August 28, 2018

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

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IMI rocket  photo: PR
IMI rocket photo: PR
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