Israeli defense electronics company Rafael Advanced Defense Systems Ltd. will pay the state treasury a NIS 425 million dividend from its accumulated profits, it was agreed in prolonged negotiations between the Government Companies Authority, headed by Yaakov Quint, and Rafael executives. An agreement was reached in recent days and approved by Rafael's board of directors.
Rafael has NIS 2.5 billion in accumulated profits, and company executives have argued on a number of occasions that the money should be used to develop the company's activities or its subsidiaries, and to finance research and development for its future products.
The state has been trying to collected an exceptional dividend from Rafael for a long time under a cabinet decision to demand that the Government Companies Authority collect exceptional dividends from companies with accumulated profits.
At the end of last year, Rafael's board of directors discussed the Government Companies Authority's demand for an exceptional dividend of NIS 500 million from the money accumulated in the company's treasury over the years. The company's board of directors voted unanimously against paying money to the state.
This position changed during the negotiations by Rafael and businessman Avichai Stolero to acquire unmanned aerial vehicles company Aeronautics (TASE: ARCS) for NIS 850 million. The deal was approved yesterday at a meeting of the social and economic cabinet. The cabinet decision was preceded by a lengthy examination by the Government Companies Authority in which Rafael was required to change several clauses in its partnership agreement with Stolero.
Simultaneously with the approval of the Aeronautics deal, the Government Companies Authority and Rafael also discussed the issue of the exceptional dividend. These discussions culminated in an agreement that the company would pay the state NIS 425 million, including tax.
Under this agreement, NIS 269 million of the exceptional dividend that Rafael will pay the state will be returned to the company over five years, starting in 2021, while reducing the annual dividend that Rafael is required to pay the state. At the same time, the agreement between the Government Companies Authority and Rafael stipulates that these reimbursements will be made only if the company increases its annual profits beyond its current profit margin, and after payment of a minimum annual dividend of NIS 166 million in ensured.
Incentive to increase Rafael's growth rate
In 2018, Rafael's sales totaled $2.6 billion, and its net profit was $133 million. The condition set by the Government Companies Authority for reimbursement of part of the exceptional divided that it is to pay therefore constitutes an important incentive for increasing Rafael's growth rate.
Regardless of the exceptional dividend agreed in the negotiations with Rafael, the company will paid the state treasury an annual dividend on its current profits for 2018.
Rafael is regarded as the best government company in Israel. According to data previously reported by the company, it has paid the state NIS 1.8 billion in dividends since 2002. It has paid the state 50% of its profits, but most of the efforts by the state to collect additional dividends from Rafael's accumulated profits were unsuccessful.
In 2013, then-Minister of Finance director general Yael Andorn agreed with Rafael that it would pay a NIS 300 million exceptional dividend and get it back in 2015-2018.
National responsibility and the company's soundness
The state once more asked Rafael for a dividend from its accumulated profits, this time NIS 350 million. The company board of directors was opposed, and the dividend was not paid.
"We held lengthy discussions with Rafael's board of directors, and in a show of responsibility toward Israel's economy and preservation of the company's financial soundness, we reached agreement on a special dividend from a broad perspective of the good of the state and the company," Government Company Authority senior deputy director general Uri Sheinin said.
Commenting on the dividend agreement and Aeronautics acquisition by Rafael and Stolero, Quint said, "The company should be congratulated for business results that make it possible to withdraw a high dividend for the state treasury. Rafael's acquisition of Aeronautics is an expression of the mergers and acquisitions strategy that should be pursued in order to strengthen the defense industries."
Rafael said in response, "As part of the government decision that resulted in a demand for payment of NIS 500 million, discussions took place between the Government Companies Authority and Rafael in which the subject and its consequences for the company were examined. Out of understanding and a demonstration of responsibility for Israel's economy on the one hand and maintaining Rafael's financial soundness on the other by the Government Companies Authority and Rafael, Rafael's board of directors has approved payment of a NIS 319 million special dividend in an arrangement in which most of the amount will be deducted from future dividends that Rafael pays to the state, as it has done up until now, with dividends totaling over NIS 2 billion."
Published by Globes, Israel business news - en.globes.co.il - on August 14, 2019
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