The challenges facing Maj. Gen. (res.) Nimrod Shefer, the new CEO of Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1), whose appointment was approved by the company's board of directors last Thursday, are many and difficult. In addition to the main target set by IAI chairperson Harel Locker of quickly addressing the problem of efficiency at IAI while increasing the company's operating profit to at least 9%, Shefer will have to decide whether to renew the contacts that took place several months ago on a secret channel aimed at integrating the activities of IAI and Rafael Advanced Defense Systems Ltd. or even a full merger between the two companies.
Senior defense industry sources inform "Globes" that the idea of uniting the activities of IAI and Rafael was formulated by senior parties at IAI, who enlisted support for the idea from the Government Companies Authority. "The Government Companies Authority and IAI wanted a merger, and meetings took place with Rafael on the matter while carefully maintaining secrecy lest the idea be leaked and upset the workers' organizations at the two companies," a senior source involved the negotiations told "Globes." "The parties did not get to discussions concerning labor relations. It was clear to everyone that discussion of this subject was relevant, because it was not acceptable for two government defense companies whose growth engines are centered on development and production of missile systems to compete against each other in the local market and in markets around the world."
The Government Companies Authority and its then-head, Ori Yogev, expressed support for the plan, seeing logic and advantages in its implementation. Why, then, has it been left in the discussion room at least for now? One source claims that the idea was abandoned during a period of changes in the Government Companies Authority, with Yaakov (Yanki) Quint replacing Yogev early this year. Another source said that the idea had been abandoned even earlier because of lack of interest and passivity on the part of the Ministry of Defense, while a third source said that Rafael had refused to continue promoting the idea because under any scenario of a merger with IAI, Rafael would be swallowed up into it, due to the fact that Rafael was smaller than IAI - 6,500 employees at Rafael compared with 15,000 at IAI. "Rafael is a good company. Why should it get mixed up with IAI's problems? It pays the state a dividend and it has good sales and a good image. There was no great enthusiasm there for a such a union," one of the sources explained.
The background to these contacts, as reported for the first time in "Globes," was IAI's attempt to improve its competitive capability in global markets and its profit margins. Both IAI and Rafael face tough competition in missile systems. This attempt followed the dramatic event that required the two government defense companies to reassess their situation: the privatization of IMI Systems Ltd. (IMI) and its sale for NIS 1.8 billion to Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT), controlled by Michael Federmann.
IAI and Rafael objected to the emerging merger of Elbit Systems and IMI on many occasions. Neither company concealed its concern about the enormous power that Elbit Systems would acquire following the acquisition of IMI, which would totally change the local defense market. Despite these objections, the Ministry of Defense supported the sale of IMI to Elbit Systems, explaining that it would be able to regulate the competition in the Israeli defense market and preserve each company's unique advantages. "The new CEO of IAI, Nimrod Shefer, will have to decide what to do about this. Even before IMI and Elbit Systems, the situation in the global markets was difficult, competition was hard, and it was impossible to continue with a situation in which two missiles manufacturers from Israel, both state-owned, compete with each other around the world. The two companies lost a lot of money because of this competition," a senior source told "Globes."
The concern of IAI and Rafael about Elbit Systems' acquisition of IMI was brought to the attention of Antitrust Authority director general Michal Halperin; the Antitrust Authority is still assessing the effect of such a merger on the other defense industries in Israel, even though many parties are convinced that the merger will have a significant influence mainly on IAI and Rafael.
IAI and Rafael were previously mentioned in connection with mergers, but with IMI: in an attempt to solve IMI's problems, the Government Companies Authority and the Ministry of Defense considered a possible merger between IMI and Rafael in 2010. IAI wanted to dismantle IMI so that some of its business would be shared with IAI and the rest with Rafael.
Some of the sources informed about a merger of IAI with Rafael expressed skepticism over the weekend about its feasibility with Shefer as CEO of IAI. Locker and Quint have been interested in recent months in an old plan devised for IAI - an offering for 49% of the company.
What has been an obstacle to a an IAI offering in the past and still constitutes an obstacle is the company's losses, especially in its civilian business: the activity of IAI's Bedek Aviation Group and civilian aircraft division cost IAI $40 million in losses in 2017.
Shefer will have to restart the plan for consolidating IAI's civilian divisions into a new more efficient and profitable aviation division in the coming months. It is not going to be easy, because any such streamlining plan will require either personnel cutbacks or taking benefits away from workers. "IAI cannot be competitive when it pays an engineer $80-90 per hour. It will never make a profit that way," a company source told "Globes."
Published by Globes [online], Israel business news - www.globes-online.com - on June 24, 2018
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