The leadership of Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1) shed not a tear when former Minister of Defense Avigdor Liberman announced his resignation a month ago. A few weeks earlier, Liberman had ordered the company chairperson Harel Locker and the head of the Government Companies Authority Yaakov Quintto to suspend all measures related to the plan to issue 25% of the company's shares on the Tel Aviv Stock Exchange (TASE).
Liberman's decision, as reported in "Globes," was based on an opinion submitted to him by Ministry of Defense Deputy Director General responsible for security in the defense establishment Nir Ben Moshe, that the offering was liable to expose secret and sensitive activities at the company.
Liberman's order took IAI's executives by surprise, and sources in the company reported general dismay. Locker and Quint were very much in favor of the offering.
When Prime Minister Benjamin Netanyahu announced that he would keep the Ministry of Defense portfolio for himself, IAI's leadership breathed a sigh of relief. Locker, a former Prime Minister's Office director general, is very familiar with Netanyahu's outlook on the matter, and took it with a smile on his face. After Netanyahu became minister of defense, the plan was taken out of the freezer, and will be brought to the ministerial privatization committee for approval in the coming weeks - further proof that things happen quickly when the right people want them to.
Locker, IAI CEO Nimrod Sheffer, and EVP, CFO, and deputy CEO-designate Eyal Younian are working all out to push the offering through. For them, it is an essential measure for accomplishing the company's growth plans for the coming years - the solution for getting the company out of its doldrums.
The vision: An international company
Locker's plan for an offering is based on plans drawn up several years ago, but never carried out. The company and the Government Companies Authority want to issue a quarter of IAI's shares at a company value of NIS 12 billion.
The company plans to use the expected NIS 3 billion proceeds to acquire several small companies in Israel and overseas in order to bolster its competitive capabilities, while turning it into a global company, at least according to Locker's vision.
IAI anticipates that the offering will result in relief of its regulatory burden applying to it as a government company and enable it to take advantage of the substantial benefits granted to exporting high-tech companies under the Law for the Encouragement of Capital Investments.
The tax benefits amount to tens of millions of shekels a year that are not being granted now because of a decision by the Ministry of Economy and Industry and the Ministry of Finance a number of years ago that the Law for the Encouragement of Capital Investments would not apply to Israeli defense companies. To make things even more ridiculous, IAI's main competitor, as a non-government company, Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT), continues to enjoy these benefits. The attempts by IAI's heads in recent years to change the decision were unsuccessful; for them, an offering by the company could be a back door to enjoying the benefits of the Law for the Encouragement of Capital Investments.
A change in DNA
Speaking yesterday at a conference conducted by the Eli Hurvitz Institute of Strategic Management at the Tel Aviv University Coller School of Management, Locker made a rare public comment about IAI's plans. He said, "We must issue a minority of the shares. It is essential for all of the goals we face, and we need capital. There is no reason to raise bonds or loans and pay interest and financing costs in a rising interest rate environment. I want everyone in Israel to read IAI's results in the newspaper. I want the return on equity, I want the share profit, and I want IAI to be a business company that is transparent with the disclosure requirements of the Israel Securities Authority."
Locker is convinced that IAI needs a change in DNA in order to grow and cope with the tough competition. He thinks that the change in the company will begin when the transparency rules required for trading on the Tel Aviv Stock Exchange (TASE) are applied to the company. "Only thusly, with the threat posed by the daily measure of the share price and other things applying to a company on the scale of ours and listed on the TASE, can we change its DNA, so that it no longer depends on anyone - not a particular chairperson or CEO," Locker said yesterday.
Locker added, "Israel will never lose control of IAI. No one will hold more than 5% of it. It's not a salami tactic (distribution of the company in stages, Y.A.). The government will not give up control of such an important entity."
Concern about sales of control of IAI through salami tactics led former Minister of Defense Amir Perez to publish a Facebook post yesterday opposing the planned offering. "Although only part of the shares is involved, we are familiar with the salami tactic: this slice will only whet the appetite of the tycoons eager to take over the asset. The offering will also damage the employment security of tens of thousands of IAI employees and create a concrete risk that sensitive defense information relating to civilian and military projects will be leaked and reach the wrong hands. There are assets that should not be sold and bought for money, and state security is one of them," Perez wrote.
Whether or not it was deliberately timed, Liberman uploaded a post attacking the offering. "A professional opinion of a state agency responsible for general and information security in Israel's defense industries stated unequivocally that IAI should remain in state hands. It need to undergo streamlining, but the nation's inalienable assets must not be put in private hands," Liberman wrote.
A senior IAI executive responded to the posts by Liberman and Perez by saying, "Our prime minister understands security at least as well as they do, but it turns out now that he is better at making economic decisions than they are."
A date with investors
Earlier this week, IAI workers' committee chairperson Yair Katz delivered a message to all of the employees: without us, the offering will go nowhere.
As far as is known, as of now, no dialogue is taking place between management and the workers' committee about the offering. The parties are busy negotiating the consolidation of IAI's civilian divisions scheduled for early 2019. Several items discussed by the parties in recent weeks have already been passed to other government agencies, almost certainly in an attempt to create infrastructure for future commitments.
In the background of all of this, senior defense industry sources are raising eyebrows about the timing chosen by IAI's management for promoting the offering. They do not understand why Locker is in such a hurry. The company lost $20 million in the last quarter and management and the workers' committee are preoccupied with mutual deterrence, while the company suffers from overstaffing and inefficiency. These situations do not contribute to the sex appeal of a company embarking on an offering, which needs positive sentiment from investors.
Published by Globes, Israel business news - en.globes.co.il - on December 12, 2018
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