Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT) will pay NIS 1.8 billion for the acquisition of IMI Systems Ltd. (IMI) (formerly Israel Military Industries) and has been promised the same NIS 1.8 billion when the IMI Systems site in Ramat Hasharon is vacated in stages, with the company moving to plants it will build at Ramat Beka in the Negev.
These commitments are coming on top of monetary benefits, called "incentive mechanisms," that Elbit Systems will receive. The benefits include a safety net of procurement by the Ministry of Defense from the merged company amounting to NIS 250 million a year for five years, agreement to receive part of the acquisition price only after 2-4 years, and a seller's loan provided to Elbit Systems by the state on preferential terms.
Even though Elbit Systems' acquisition of IMI Systems is in effect becoming a acquisition for no payment, there are signs that Elbit Systems is liable not to move IMI Systems' plants to Ramat Beka with the knowing acquiescence of senior Ministry of Finance personnel, the Government Companies Authority, the Accountant General, the Ministry of Finance budget department, and the heads of the Ministry of Defense, while failing to fully disclose the information to the Knesset, the public, and workers at IMI Systems and Elbit Systems, who are facing a major structural change that is also liable to substantially reduce their numbers.
Kahlon and Liberman are relying on their staff
It appears that both of the ministers relevant to the deal - Minister of Finance Moshe Kahlon and Minister of Defense Avigdor Liberman - are aware of this, but are relying on their professional staff, keeping silent, and continuing to make promises. In his June 19 announcement, Liberman said, "In the bottom line, hundreds of millions of shekels will be injected into the defense industry and the Negev and will ensure 1,000 jobs for many years." Kahlon said on the same occasion, "The transfer of the factories to the Negev will allow the construction of thousands of apartments in the middle of high-demand areas and strengthen industry and employment in the Negev with thousands of jobs."
This is the main reason why even now, after the state has already announced the sale agreement, with the final signing scheduled for early July (next week), no agreement binding Elbit Systems to vacate the IAI site and move it to the Negev has yet been signed. It is believed that the silence and ignoring the need for a written contract is in the interest of the Ministry of Defense and the Ministry of Finance in order to allow completion of the sale.
State Comptroller Joseph Shapira commented on this in the penetrating report he published this week. He expressed wonder that "The Ministry of Defense and the Ministry of Finance, including the Government Companies Authority, were unable to ensure complete implementation of the plan for transferring all of IMI Systems' factories and facilities from the Ramat Hasharon site to Ramat Beka in accordance with the privatization decision." The unit in the State Comptroller's Office responsible for auditing the Ministry of Defense, which wrote the report, emphasized that it did not accept the answers of the state agencies leading the sale and insisted that the transfer to the Negev be a condition for the privatization and sale and could not evaded. The unit wrote, "The State Comptroller's Office is notifying the Government Companies Authority and the Ministry of Defense that it does not accept their answers in view of the Government Companies Authority's documents and the privatization decision, which state categorically that the Ministry of Defense, in cooperation with the Accountant General, the Ministry of Finance budget department, the Government Companies Authority, and the Israel Land Administration (ILA), must approve the plan for transferring IMI Systems' plants from the Ramat Hasharon site only to Ramat Beka and put responsibility for doing this on IMI, IMI Systems, or the buyer."
The report went on to state, "Before the sale of IMI Systems to Elbit Systems is completed, the Ministry of Finance and the Ministry of Defense must verify that the actions necessary for moving all of IMI Systems' plants and facilities from the Ramat Hasharon site to Ramat Beka by 2022 at the latest are being carried out, as required according to the privatization decision." It is believed that there is silent tacit assent that the only things that will be moved to Ramat Beka, and even that without a commitment or sanctions, are activities pertaining to hazardous materials, chemical laboratories, and testing areas. All the rest of IMI Systems' activity will be spread among the existing plants of Elbit Systems and IMI Systems.
The Ministry of Finance and the Ministry of Defense turned a blind eye
The arrangement and agreements for vacating the Ramat Hasharon site and transferring the factories to Ramat Beka were signed by IMI Systems' management with ILA in 2014 and 2015 with no connection to the privatization plan. A master plan for a transfer to the Negev and the terms for the removal were approved in 2014 and the transfer and construction agreements were signed with the Ministry of Finance, the Ministry of Defense, and ILA. IMI Systems received NIS 10 million for preparing the master plan; approval of the urban building plan, which had already been deposited with the Southern District Planning and Building Commission; designing the development, engineering, production and testing systems; and designing the operating concept for the various systems.
At the same time, IMI Systems and ILA signed the following financial arrangement: the Ramat Hasharon site is to be vacated in three stages planned in advance. NIS 1.2 billion will be gradually transferred to IMI Systems, NIS 300 more according to the rate of progress in construction at Ramat Beka, and NIS 300 million more for additional milestones. IMI Systems has already carried out some of these steps and with the signing of the sale to Elbit Systems, all of the agreements, obligations, and proceeds will be transferred to Elbit Systems.
Some believed that Elbit Systems was seeking more money for IMI Systems' move and was therefore delaying its consent to the transfer. Last year, however, it became clear that Elbit Systems' working plan and the structural change that it was planning following the acquisition involved the consolidation of activities and the merging of production lines. The Ministry of Finance and the Ministry of Defense did not dare to return to the government and the Knesset and tell them, "Privatization, yes; Ramat Beka, no," so they ignored it.
It is believed that Elbit Systems will honor the commitment to vacate the Ramat Hasharon site, but will not build a corresponding facility at Ramat Beka, and possibly also not a facility at which thousands of people will be employed. In this case, it is obvious that this is activity constituting a material breach of the terms for privatization of IMI Systems. It is not clear, however, what this means for the financing obligations, i.e. the transfer of money agreed with the state and the ILA.
"Elbit Systems will fulfill all of the commitments"
The Ministry of Defense said in response, "The agreement for vacating the Ramat Hasharon site and the money promised for vacating the site and moving IMI Systems' factories to Ramat Beka were part of the competitive proceeding that took place and were presented to all of the bidders that took part in the proceeding. In accordance with the privatization decision and the state's interest in having the Ramat Hasharon site (a 6,000-dunam (1,500-acre) site) vacated in order to proceed with plans for residential construction on the site, arrangements were established for vacating the Ramat Hasharon site and moving IMI Systems' plants from it.
"The arrangements stipulate that NIS 1.5 billion will be given by ILA as a grant for vacating the site and construction in Ramat Beka. This grant was to have been paid to IMI Systems for vacating and construction, even without privatization, in order to promote the public goal of vacating the site. NIS 300,000 more from the amount paid by the party acquiring IMI Systems will be paid to the company for building the factories at Ramat Beka as an additional incentive for this construction.
"The cost of moving IMI Systems' facilities in Ramat Hasharon to the site in Ramat Beka was assessed in 2015, based on an engineering master plan conducted by an external engineering firm. The cost was estimated at NIS 1.8 billion, not including considerable associated costs amounting to tens or hundreds of millions of shekels (involving the transfer and training workers, among other things)."
Elbit Systems said in response, "In the framework of the sale agreement signed by Elbit Systems, the company's commitments concerning the vacating of land and the industrial activity in Ramat Hasharon are well and clearly defined. Elbit Systems will fulfill all of its obligations, agreements, and understandings relating to the vacating of land in Ramat Hasharon as agreed with the state. Elbit Systems has no demands for additional financing beyond the amounts listed in the sale agreement. It is committed and intends to vacate all the areas in the Ramat Hasharon site, as it undertook in this agreement, no later than the agreed upon dates." The company added, "The company is committed and intends to carry out the move to Ramat Beka and to build there the factories moved from Ramat Hasharon to Ramat Beka and will fulfill all of the undertakings and agreements in this matter."
Published by Globes [online], Israel business news - www.globes-online.com - on June 28, 2018
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