Israel Aerospace sees Rafael merger as inevitable

Harel Locker Photo: Eyal Izhar

IAI is eager to merge but Rafael is unenthusiastic about putting its "healthy head into a sickbed."

Following the defense industry mergers between Elbit Systems and IMI Industries, a merger between Israeli government defense companies Israel Aerospace Industries (IAI) and Rafael Advanced Systems is once again on the agenda.

"There is no logic in two government companies competing with each other in the missiles sector; the situation requires them to merge," IAI chairperson Harel Locker told "Globes," explaining that the merger was inevitable. Locker spoke in a similar vein last week to "Aviation Week" while his company was participating in the Paris Air Show.

Support for his comments comes from a report in "Globes" in June 2018 that just before Nimrod Sheffer took up the reins as CEO of IAI, the two companies were holding confidential talks about consolidating their activities, and even about a full merger.

"IAI and Rafael are business companies and the largest exporters in the economy, with IAI exporting $10 billion a year, 80% of its output, and Rafael exporting 50% of its output. The global trend is towards mergers, and the industry is becoming a field for giants. IAI is a national focus of know-how in radar, outer space, unmanned aerial vehicles, aviation, and missiles. Rafael is also a national focus in missiles," Locker said

Concern about the Aeronautics deal

"As part of the consolidation trend in the defense industry, we merged three IAI divisions this year that formerly operated separately into a single export-oriented division with a focus on business. Actually, there is already a lot of cooperation between IAI and Rafael. For example, IAI's radar is installed in Iron Dome," Locker explained.

The 2018 merger discussions reported in "Globes" ended without results, among other things because of Rafael's refusal out of concern that it would be "swallowed up by IAI."

The Government Companies Authority was involved in these talks, after agreeing with IAI that it was ridiculous for two government companies whose main growth engines involve development and production of missile systems to compete with each other in the local and global markets.

Since the matter was taken off the agenda, competition between the two government defense companies escalated over the past year, reaching a peak in the Aeronautics deal: Rafael and businessperson Avichai Stolero moved towards the acquisition of the Yavne-based UAV company for NIS 430 million. Rafael coveted Aeronautics' aircraft in order to use them to improve its competitive ability in global markets, thereby increasing its exports.

IAI feared that Rafael's entry into the UAV sector would hurt it in this market, and made its own bid to acquire Aeronautics for NIS 600 million. Rafael and Stolero eventually doubled their original offer, and are now in advanced proceeding towards acquiring Aeronautics for NIS 850 million. The deal is awaiting approval by the Government Companies Authority.

At the same time, Rafael recently began stepping up its satellite activity, a field in which IAI currently enjoys absolute exclusivity. IAI is a developer and manufacturer of the Opek series of intelligence satellites used by the Ministry of Defense, and Rafael is trying to penetrate this sector with nano-satellites that will supply intelligence output for its customers.

Concern about the union of Elbit Systems and IMI

The merger between Elbit Systems and IMI has been proceeding. Six months ago, Elbit Systems completed a prolonged process of acquiring IMI, a merger to which both Rafael and IAI objected. Rafael and IAI each took separate action with the Government Companies Authority and the Israel Competition Authority in an attempt to stop the sale of IMI to Elbit Systems, fearing that a new significant force would be created that would detract from their market shares, especially in the missile market. These efforts were unsuccessful, and government sources believe that the Elbit Systems' acquisition of IMI is another reason for the serious talk about a historic merger between IAI and Rafael.

Supporters of the merger say that it is unavoidable. The assert that it will prevent the intense competition between the two companies in the international market and enhance their ability to devise a new future line of products.

One example of successful cooperation between Rafael and IAI is Iron Dome, developed by Rafael, based on radar made by IAI subsidiary Elta Systems.

As far as is known, the main opponent of a merger is Rafael, which is significantly smaller than IAI. Senior company figures fear that Rafael will be swallowed up in IAI. IAI has 15,000 employees, compared with 6,500 at Rafael. Senior sources close to Rafael previously called its possible merger with IAI, "putting a healthy head in a sickbed" - a description with some justification, considering IAI's efficiency problems, the dominance of its workers' committee, and its questionable image of politicization, among other things.

Published by Globes, Israel business news - en.globes.co.il - on June 25, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Harel Locker Photo: Eyal Izhar
Harel Locker Photo: Eyal Izhar
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