Following internal disagreements in the Ministry of Finance concerning the method for the impending privatization of Israel Military Industries Ltd. (IMI), sources involved in the measure are calling for a comprehensive examination by the Antitrust Authority of the consequences of selling the company to Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT). Elbit Systems is the only company currently bidding to acquire IMI from the state, after four companies that had reached the final hurdle withdrew in recent months from the tender to acquire the defense firm.
It is believed that official negotiations between a joint Government Companies Authority-Ministry of Finance team and an Elbit Systems team will begin in two weeks, with a key issue on the agenda: the price that Elbit System will pay for IMI. The government team contains Government Companies Authority head Ori Yogev, Ministry of Finance budget director Amir Levy, and Ministry of Finance legal advisor Asi Messing.
Sources involved in the privatization said that according to the privatization procedure set in advance, the deal would be brought to the Antitrust Authority for its opinion of the consequences only after agreement is reached with the buyer and the deal is closed. According to these sources, the Government Companies Authority should seek the Antitrust Authority's involvement already at the current stage, because Elbit Systems is the only bidder for the IMI acquisition. The sources added that if the negotiations between Elbit Systems and the state are successful, the private-public company controlled by Michael (Mickey) Federmann will boost its market power substantially and become a monopoly in the defense market.
The Government Companies Authority has kept a low profile in recent weeks with respect to the IMI sale process. There are profound disputes between the Ministry of Finance budget department and the Government Companies Authority, which supports the sale of IMI to Elbit Systems, while the Accountant General department opposes the measure in its current format.
Most of the dispute concerns the amount Elbit Systems is likely to pay the state for IMI. Sources involved in the process claim that Yogev will be satisfied with sales proceeds of NIS 1.5 billion, while Accountant General Michal Abadi-Boiangiu believes that the state should charge Elbit Systems NIS 2-2.2 billion for the company.
Elbit Systems is also being careful to maintain absolute silence about the negotiations taking place between it and the state on privatization of IMI. Sources involves in the process believe that negotiations between the parties will continue for several weeks, and even if a deal results, it will be approved only after several months.
Day after privatization
The minimum price for IMI in the sale proceeding is NIS 1.1 billion, and Yogev previously said in internal Ministry of Finance discussions, "Every penny above the minimum price is profit for the state." On other occasions, Yogev rebutted the argument that "the state is likely to find itself selling IMI to Elbit Systems for a mess of pottage." Sources supporting the sale of IMI to Elbit Systems believe that any price higher than the minimum price set in the process is preferable to the situation that has prevailed for many years, with IMI losing money and forcing the state to inject billions of shekels of public money to maintain its regular operations and pay salaries to its employees.
Another question in the discourse between the parties involved in the privatization process is the status of Elbit Systems on the day following privatization, and the Ministry of Defense's policy towards the enlarged Elbit Systems with its exclusive ability to manufacture weapons systems. Questions of Elbit Systems' possible new status were also raised in internal discussions by Abadi-Boiangiu, who gave the tenders committee a detailed letter expressing her objections.
Sources supporting her position argued that the Ministry of Defense had not considered the consequences of a merger of the two defense companies for the ministerial procurement programs in the coming years, or its policy vis-a-vis a powerful and important supplier. Among other things, a sizable proportion of the Ministry of Defense's procurement is from defense companies without a tender. In this situation, the Ministry of Defense will be confronted with three main defense companies: the expanded Elbit System, Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1), and Rafael Advanced Defense Systems Ltd..
Published by Globes [online], Israel business news - www.globes-online.com - on March 9, 2016
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