Israel Military Industries (IMI) Prepares For Privatization Plan

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Ehud Barak, former Prime Minister and former Defence Minister of Israel, a possible bidder for IMI

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The privatization of Israel Military Industries (IMI) seems to finally be high on the agenda of the State of Israel again, after lying dormant since the last attempt made to accomplish it failed in 2005.

It is reported that the Board of Directors of IMI will meet shortly to endorse a new privatization plan for the state owned company. If the details of the company’s plan pass scrutiny at board level it will then proceed to a ministerial privatization committee chaired by Benjamin Netanyahu the Prime Minister, together with Finance Minister Yair Lapid and Moshe Ya’alon the Minister of Defence.

Unlike the botched attempt in 2005 when employees and their labour union were adamantly opposed, this time around the plan has been put together after extensive consultations with the employees and the Histadrut National Federation of Labor.

IMI is a State owned defence manufacturer, which was formed originally in the nineteen thirties even before the formal establishment of the State itself in 1948. It played a crucial role in developing the capacity for self-reliance of the nascent defence forces of the new country for many of its weapons and ammunition requirements in its early days, and indeed still does in a number of specialized areas.

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American billionaire investor Ira Rennert, a possible bid partner for Ehud Barak

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As a corporation it presently employs over 3, 000 people, generates around NIS 2 billion in annual sales (close to US$600 million) and has an order backlog of NIS 5.6 billion, (about US$1.7 billion) but the company has posted losses for 14 straight years, some as high as NIS 250 million annually (almost US$70 million). Around 70% of IMI’s sales are exported to countries such as Italy, France, Turkey, Kazakhstan, Vietnam, South Korea and several African nations.

Much of its losses stem from an overburdened capital structure with heavy debts to the State and far more workers than it needs for its current role in domestic defense manufacture, for which it is no longer as critical a supplier in as many areas as it was in the earliest days of the State.

An attempt was made to privatize IMI in 2005, only to fail at that time partly because of union opposition to the large layoffs that would have been insisted upon then by any private buyer, and also because of huge unfunded pension liabilities as well in its balance sheet. In addition the massive industrial site its sits upon, in the middle of Ramat Hasharon just north of Tel Aviv, while potentially some of the most valuable real estate in the country is badly contaminated with heavy industrial pollutants from decades of heavy manufacturing operations there.

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IMI’s LYNX – Advanced artillery rockets with autonomous launching system

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After moving the manufacturing operations of IMI to another location, perhaps even in the Negev which has been proposed, the remediation and clean up of the existing site will then likely cost hundreds of millions of shekels to accomplish. Only then will the site be ready to be developed for its most valuable proposed use as residential housing. IMI has previously estimated the land could be worth as much as NIS 20 billion, once it has been decontaminated.

Accordingly, in 2005 only the small arms producing division, its then Magen division, was sold to Samy Katsav’s SK Group where it was renamed Israel Weapon Industries (IWI). Presently profitable, the IWI small arms plant has the formerly State owned Israel Shipyards as a sister company today within Katsav’s defence industrial group.

Today it was reported that American junk bond billionaire Ira Rennert may be considering entering the tender process that may emerge for the purchase of IMI in conjunction, it is said, with former Prime Minister and former Minister of Defence Ehud Barak. So far neither gentleman has been willing to make any comment.

Because of its continuing strategic importance any foreign company or individual seeking to buy IMI would need senior Israeli partners to meet the Government of Israel’s likely strict restrictions that effective control should remain within the country. This could include for example, as a minimum, a requirement that IMI’s Board of Directors should retain an Israeli majority. In such circumstance it would also not be at all unusual for a government to retain what is known as a “Golden Share” which can offer draconian voting rights under defined extreme circumstances.

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Other expected suitors for the company are said to be defence electronics specialist manufacturer Elbit Systems and even Israel defence industrialist Samy Katsav himself – who has expressed an interest in the past and who has done a good job with his previous two purchases of previously state owned assets.

It is reported that under the proposed new IMI privatization plan there will be established a new company, “New IMI”, which will inherit most of IMI’s business operations, but without the burdens which have hindered its activity in the past. These burdens will all remain with the old company and with the State. Almost 1, 000 of IMI’s existing employees – one third of the total – will voluntarily retire at a likely cost to the State of over NIS 1 billion (about US$280 million) and about the same number will receive a trusteed financial safety net to guarantee their existing accrued, but to date unfunded, pension rights after the sale, at a similar cost to the State as well.

A special monitoring unit will be established in the Ministry of Defence to ensure that national security interests are subsequently preserved as a result of the privatization process and thereafter. Among other things, it will ensure the continuation of certain armaments production lines. Moreover, the fast growing Givon rocket division of IMI will not be included in the sale.

A source close to the privatization recently is reported to have claimed the plan to be a great deal for the government, finally settling a longstanding issue that had to be dealt with. Undoubtedly the grounds for such a claim are based on the assessment that the cost of preparing the company for privatization is a fraction of the huge land development profits that the government may eventually realize from the sale of IMI’s land in Ramat Hasharon, amongst the most expensive land in Israel, even net of the substantial costs of its environmental remediation.

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