The board of directors of government company Rafael Advanced Defense Systems Ltd. today approved the acquisition of unmanned aerial vehicles (UAV) company Aeronautics Ltd. (TASE:ARCS) in cooperation with businessperson Avichai Stolero for NIS 850 million. Rafael and Stolero completed due diligence for Aeronautics in recent weeks.
Aeronautics, led by CEO Amos Matan, develops, manufactures, and markets unmanned airborne, electro-optical, and communications systems.
It now remains for Aeronautics's board of directors to approve the offer by Rafael and Stolero, following which the offer will brought before a general shareholders' meeting of the company, where a majority of over 50% will be required to approve the offer. Aeronautics's shares is up 3.3% today, and has gained 120% in less than two months, pushing the company's market cap up to NIS 780 million.
Last week, businessperson Aaron Frenkel bought 5.3% more of Aeronautics's share capital from Bank Leumi (TASE: LUMI), giving him 30.3% of the company's shares, in a deal reflecting an NIS 800 million value for Aeronautics. Frenkel, 61, whose main business is in real estate and aviation, agreed as part of the deal with Bank Leumi that if Aeronautics is sold for over NIS 800 million in the next six months, he will pay the bank an additional 5.3% of half of the difference between NIS 800 million and the value at which Aeronautics is sold. In other words, if Aeronautics is sold at a value of NIS 900 million, for example, Bank Leumi will be entitled to an additional NIS 2.5 million.
Meanwhile, following the deal, as of now, Bank Leumi lost 20% of its investment in Aeronautics (although the bank downwardly revalued its investment in Aeronautics substantially at the end of 2018, so that it will actually post a handsome profit on the investment in the first quarter of 2019). Aeronautics is controlled by the KCPS, Bereshit, and Viola funds, which own a total of 36% of the company's shares. The sale of Bank Leumi's shares leaves Menorah Mivtachim Holdings Ltd. (TASE: MORA) as the sole investment institution with a substantial holding in Aeronautics (9.4%).
Despite the fact that he attained a substantial holding in Aeronautics, parties associated with Frenkel still insist that his investment in Aeronautics is purely financial, and that he has no intention of trying to obtain control of the company. They say that Frenkel's sole aim is to his holdings in Aeronautics to Rafael and Stolero, or to any other party wishing to buy them, at a large profit. Frenkel is therefore likely to demand a higher price for his stake than the one that Rafael and Stolero are offering. Market sources believe that the price that Frenkel will demand will reflect a NIS 1 billion company value for Aeronautics, similar to the value at which Aeronautics held its IPO on the Tel Aviv Stock Exchange (TASE) six months ago.
Frenkel began collecting accumulating shares in Aeronautics in the last week of December, when he acquired insurance group The Phoenix Holdings Ltd. (TASE: PHOE1;PHOE5) at NIS 8.50 per share, 25% higher than the share price at the time of the deal. Phoenix holds 5.5% of Aeronautics's shares in provident and nostro funds. Frenkel has since acquired more shares in Aeronautics. Frenkel has spent NIS 155-160 million to date on buying shares in Aeronautics. The current market value of these shares is NIS 235 million, giving Frenkel a NIS 75 million profit on paper on his investment in the company.
Contract with an important Asian customer
Aeronautics reported today that it had signed a contract with an important customer for an UAV maintenance project. The two-year, $13 million contract is with an Asian country. Aeronautics says that the contract will become effective when it receives an advance payment.
Aeronautics became a public company in the summer of 2017, after the investment funds holding a controlling interest in it made a huge offer for sale amounting to over NIS 400 million. Aeronautics also issued new shares for NIS 53 million to Leumi Partners, the concern that led the offering, and trading in Aeronautics's shares began at a company value of over NIS 1 billion. Later, before Frenkel's purchases of shares and the acquisition bid by Rafael and Stolero, Aeronautics's share price plummeted over 60% in response to disappointing business results, combined with an affair in a foreign country involving Aeronautics. Following this affair, the Ministry of Defense suspended Aeronautics's license to market and export its UAVs to an important customer in that country.
In early January 2019, Aeronautics reported that the Ministry of Defense had reversed its suspension of the company's license to market and export its Orbiter K1 UAVS to the important overseas customer (the suspension occurred because of a deal with the customer that led to the opening of a criminal investigation against the company in August 2017). It is believed that the contract amounts to tens of millions of dollars.
Published by Globes, Israel business news - en.globes.co.il - on February 17, 2019
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