02 Jan 19. Endeavor Robotics Sues Defense Tech Major QinetiQ over Patent Infringement. Chelmsford-based Endeavor Robotics, the startup that designed the ‘Scorpion Robot,’ for the U.S. Army’s Common Robotic System-Individual (CRS-I) program, has filed a lawsuit against QinetiQ North America and Foster-Miller Inc over patent infringements. The lawsuit was first reported by Robotics Business Review. QinetiQ North America is a Waltham, Mass.,-based subsidiary of QinetiQ Group PLC, a British defense and aerospace company. According to the complaint filed in U.S. District Court for the District of Delaware, Endeavor Robotics claims that QinetiQ infringed on two patents that it owns: One for a ‘robotic platform’ and one for a ‘mobile robotic vehicle.’
“We take seriously the need to protect our intellectual property rights. As a cutting-edge technology company focused on building robots that help our customers, we’ll continue to guard our patented innovations with rigor,” said Endeavor Robotics CEO, Sean Bielat. “We believe our case is strong and look forward to a successful resolution of this matter.”
Endeavor Robotics, which split from iRobot and was sold to private equity firm Arlington Capital Partners in 2016 for $45m, claims that QinetiQ North America’s robot for the U.S. Army’s Common Robotic System-Individual program infringes on its stair-climbing robots.
The lawsuit comes at a crucial time for both companies as they vie for a contract worth half a billion dollars for the U.S. Army. The two companies are competing in a ten-month test phase of their prototypes that began in April 2018 and ends soon. The winner will snag a contract that ends in February 2027.
In December 2018, Endeavor Robotics unveiled the design of its ‘Scorpion robot’ that it developed for the Army. The company which is also one of BostInno’s 19 Startups to Watch, boasts of a clientele that includes U.S. Department of Defense and other foreign militaries including the U.K. and Germany, law enforcement agencies and groups that respond to natural disasters. It also claims to be the world’s largest provider of tactical unmanned ground vehicles, delivering more than 6,500 robots to customers in over 55 countries. (Source: Google//www.americaninno.com)
02 Jan 19. Deep Space Industries acquired by Bradford Space. Deep Space Industries (DSI), a company founded to pursue asteroid mining but which more recently has focused on smallsats, has been acquired by another space technology company.
Bradford Space, a U.S.-owned company with facilities in the Netherlands and Sweden, announced Jan. 1 that it has acquired San Jose, California-based DSI. Ian Fichtenbaum, a director of Bradford Space, confirmed in a Jan. 1 email that the deal had closed, but that terms of the acquisition could not be disclosed.
A group of entrepreneurs and space advocates founded DSI in 2012 with a goal of developing technologies for prospecting and eventually extracting space resources, such as water ice, from asteroids. It proposed carrying out those missions using small spacecraft the company planned to develop.
More recently, DSI pivoted towards smallsats in general, including the production of a propulsion system called Comet that used water as propellant. The company promoted Comet on its ability to provide performance approaching that of traditional monopropellant systems like hydrazine, but with a non-toxic propellant that was cheaper and safer to handle.
Bradford Space has its own green propulsion systems for spacecraft through its 2017 acquisition of ECAPS, a Swedish company that developed high-performance non-toxic satellite propulsion systems. Fifteen spacecraft are using those ECAPS thrusters, including three launched Dec. 3 on a SpaceX Falcon 9. That launch also carried four satellites using Comet thrusters from DSI.
Fichtenbaum said that Bradford sees Comet as a complementary product to its existing ECAPS thrusters. The acquisition will give Bradford a presence in the United States to help sell ECAPS systems and other technologies, as well as “a great engineering and production team” and customer base. “The Bradford infrastructure will also help sales of Comet in Europe and with our pre-existing ECAPS customers,” he added.
DSI, which will be rebranded as Bradford Space Inc., or BSI, will continue to work on a satellite bus called Xplorer that is intended for use on missions beyond Earth orbit. “The DSI team provided very innovative solutions to the problem of exploring the solar system at a reasonable cost, and we are eager to see if that can be developed with the help of Bradford technologies,” Fichtenbaum said in the statement announcing the acquisition. Those technologies include components on ESA’s BepiColombo mission to Mercury launched in October and the JUICE mission to Jupiter under development.
He didn’t rule out continuing to pursue asteroid mining, at least as a long-term aspiration for the company. “For commercial asteroid mining, we are not people who sneer at its prospects,” he said in an email. “We believe it has a real future and want to see if DSI’s Comet and Xplorer as well as Bradford’s existing activities can play a part of that future.” He added, though, that “for now we are taking things step by step.”
The acquisition of DSI comes a little more than two months after another startup with asteroid mining ambitions, Planetary Resources, was acquired by ConsenSys, a blockchain technology company. The founder of ConsenSys, Joseph Lubin, said in a statement at the time that Planetary Resources fit into its vision of “democratizing and decentralizing space endeavors” but has provided few details on how that would be carried out. (Source: Space News)
02 Jan 19. Kromek’s contract momentum building. Contract momentum continues to build at Sedgefield-based Kromek (KMK:26.5p), a radiation detection technology company focused on the medical, security and nuclear markets. In fact, since mid-November, the company has won two significant awards, work on which has already commenced.
The first is a five-year supply contract worth at least $7.8m (£6m) from an existing original equipment manufacturer (OEM) customer, a leading company in X-ray imaging systems, for its next generation baggage security screening detectors. Kromek’s proprietary cadmium zinc telluride (CZT) technology is designed to enhance the detection of an extensive range of threat materials and is being installed within the client’s existing baggage screening units to improve their accuracy and efficiency. It comes at a time when there is a strong tailwind driving the $2bn (£1.6bn) global security screening market in air transportation, ports, borders and freight.
Kromek was also been awarded its first contract (worth $1.99m over a 12-month period) for biological-threat detection by the Defense Advanced Research Projects Agency (DARPA), an agency of the US Department of Defense, to develop a proof-of-concept device for a vehicle-mounted biological-threat identifier. This builds on the success of the company’s work with DARPA in nuclear-threat detection using its ‘dirty bomb’ detectors, which are 10 times faster at detecting gamma and neutron radiation, and at a tenth of the cost of conventional detectors.
The aim is to develop a next-generation vehicle-mounted system capable of rapidly identifying the pathogens used in any biological attack, enabling a quicker response and reduced harm to people and the environment. The new system will reduce the detection and pathogen identification time to just five hours, a huge time saving on current systems, which take between 36 to 48 hours. The ‘proof of concept’ contract could potentially be extended to a multi-year multi-million dollar contract for the development of a fully deployable system. I expect it will be, and is unlikely to be the only one, as the release of nerve agent Novichok in Salisbury highlights just how real the threat is from chemical/biological warfare.
Taking into accounts these two awards, Kromek has now won $22m of new contracts over the past 12 months, thus significantly de-risking estimates from analysts at both Cantor Fitzgerald and Equity Development, which predict that the company can boost annual revenues by more than a quarter to £15m and more than treble underlying cash profits to £1.65m in the financial year to the end of April 2019. The growing contract momentum also de-risks expectations of cash profits almost doubling to £3.1m on revenues of £18.8m in the 2019-20 financial year.
Moreover, analysts’ estimates don’t factor in the opportunity Kromek has with its ‘dirty bomb’ detectors if Kromek secures a slice of a huge $8.2bn US government contract. Each city contract could be worth $10m in revenue to Kromek. Clearly, it’s a waiting game here, but the company is well positioned given that the technology is already being used by the US Department of Homeland Security to develop CZT detector modules for commercial off-the-shelf detectors for advanced X-ray systems in passenger baggage screening. US Defense Threat Reduction Agency is also using it in the development of the next generation of handheld nuclear radiation detectors.
US government contracts aside, Kromek’s CZT-based radiation detection technology has real potential to deliver major contract awards in the medical imaging industry. It’s already being used by 11 OEM customers across single photon emission computed tomography (SPECT), BMD (to treat osteoporosis) and gamma probes (used for radio-guided surgery). If demand for CZT-SPECT medical imaging really takes off, as I suspect it will given that the detectors are capable of diagnosing and monitoring conditions such as Parkinson’s disease and making early diagnosis of cancer, Kromek is well placed to win contracts from rivals to market leader GE Healthcare which has been investing heavily in its own technology. That’s because Kromek has already invested in a state-of-the-art facility in Pittsburgh, Pennsylvania, that has the design, engineering and technological capabilities needed to produce commercial quantities of the material.
It’s worth pointing out that the 13 per cent fall in sterling against the US dollar since the start of Kromek’s 2018-19 financial year is providing a positive translational currency tailwind on international sales, as over half of Kromek’s sales are in US dollars. The bottom line is that net of £7.7m net cash on its balance sheet, the company’s enterprise value of £62.5m equates to 20 times cash profit estimates for the 2019-20 financial year, a multiple that could drop sharply if Kromek continues to win contracts at the current rate. That is a real possibility in my view, which is why I continue to rate the shares a buy and have a 37p target price, having first initiated coverage at 25p (‘Follow the smart money’, 27 Feb 2017). Buy. (Source: Investors Chronicle)
01 Jan 19. Israel Aerospace considering investment in drone maker Aeronautics. State-owned defense contractor Israel Aerospace Industries (IAI) [ISRAI.UL] said on Tuesday it was in talks to invest in local drone maker Aeronautics (ARCS.TA). The talks were at an early stage, IAI said, and no financial details were disclosed. Meanwhile Aeronautics, which was searched on Monday by Israel Securities Authority investigators, said separately it was also talking to another unidentified group regarding the sale of its 50 percent stake in the surveillance and reconnaissance company Controp Precision Technologies. In August, Aeronautics rejected a 430m shekel ($115m) acquisition offer from IAI rival, state-owned Rafael Advanced Defense Systems, and businessman Avihai Stolero. Israel-based Aeronautics manufactures unmanned aerial vehicles for military surveillance and defense purposes, as well as for the commercial sector.
On Monday, investigators from the market regulator searched Aeronautics’ office, the company said. A court has placed a gag order on details of the investigation.
It was not the first time Aeronautics has been probed by Israeli authorities.
In August 2017, Aeronautics said the Defence Ministry had suspended the marketing and export license for one of the firm’s attack drones to a single, significant customer in a foreign country. It denied it was at fault.
Israeli media at the time reported that the ministry had opened an investigation into Aeronautics over whether during a demonstration in Azerbaijan one of its drones was used to attack a military position in the neighboring country of Armenia, and if so, who was at fault.
In November that same year Israeli police said they were investigating one of the drone maker’s deals but did not give details. (Source: Defense News Early Bird/Reuters)
19 Dec 18. Chapter 15 Bankruptcy in the U.S. Entered Into by Avanti Communications (Advanced TV Report). Advanced TV is reporting that Avanti Communications has had to enter Chapter 15 bankruptcy in the U.S. as part of its recent financial restructuring. Chapter 15 is a section of the U.S. bankruptcy code that deals with jurisdiction and, under Chapter 15, a business based outside the U.S. can obtain access to the U.S. courts and the formula is used in particular where more than one country is involved. A report on Avanti’s predicament was carried on December 14 by New York-based lawyers Weil, Gotshal & Manges LLP in a blog by David Griffiths and Alexander Welch and spoke of a decision by Judge Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York and explained how Avanti was at one stage carrying some $1bn in debt obligations comprised of approximately $118m in outstanding super-senior term loans maturing in 2020 (the “Term Loans”), $323mi in outstanding senior secured notes maturing in 2021 (the “2021 Notes”), and $557m in outstanding senior secured notes maturing in 2023.
The issued debt was guaranteed by Avanti and each of its direct and indirect subsidiaries. The bulk of that debt has now been restricted in a ‘debt for equity’ swap with its lenders.
Avanti started its financial a year ago in December 2017, and with the conclusion (in April 2018) of the process dramatically reduced its interest payment on its debt. It swapped some $557m of debt for new shares, although still has significant obligations.
“In late 2017,” explains the blog, “Avanti faced increasing financial pressures due to an overleveraged capital structure and delays in manufacturing and procurement. Avanti and an ad hoc group of holders of its Terms Loans and Notes entered into preliminary discussions for a comprehensive balance sheet restructuring. This was approved by Courts in London. To protect its reorganisation efforts and ensure fair and efficient administration of the restructuring, Avanti sought to then have the Scheme recognised in the US under chapter 15 of the Bankruptcy Code.”
The end result for Avanti was that its financial restructuring was recognised — and approved — by UK authorities, and then the U.S. court under this Chapter 15. Judge Glenn ruled that the financial restructuring was capable of recognition in the U.S. so long as it did not prejudice the rights of U.S. citizens or violate U.S. domestic public policy. Additionally, he deemed the Guarantor Releases as being necessary to give practical effect to the Scheme. He expressed concern that failure to enforce the Guarantor Releases would otherwise have significantly prejudiced creditors to the detriment of the reorganization. (Source: Satnews)
19 Dec 18. Acquisition of Globecomm Now Completed by Speedcast. Speedcast International Limited (ASX: SDA) (“Speedcast”)has announced that on December 14, 2018, the firm completed the acquisition of Globecomm Systems Inc. (“Globecomm”) for cash consideration of $134m (net of cash acquired). Globecomm has a multi-network infrastructure in over 100 countries and the acquisition strengthens Speedcast’s global leadership enhanced competitive positions in Government, Maritime, and Enterprise. The acquisition complements Speedcast’s acquisition of UltiSat in November of 2017 by doubling the company’s revenue in the Government sector and adding more scale, visibility and capabilities in this growth market. In addition, Globecomm will benefit from Speedcast’s scale and capabilities in the Maritime and Enterprise sectors.
Speedcast is confident of achieving a targeted US$15m in annual cost synergies within 18 months of completing the acquisition, as communicated previously. The cost synergies are expected to be generated across the business, including through footprint rationalization, network improvements and improved procurement.
Executive Comment
Speedcast CEO Pierre-Jean Beylier said that the acquisition of Globecomm fits perfectly with Speedcast’s strategy to build competitive advantages based on scale, reach and unique capabilities. Globecomm is particularly complementary as it significantly strengthens the firm’s Government division at a time when government spending globally is expected to rise. Globecomm also has a strong reputation providing remote communications and professional services to key customers in Maritime and Enterprise and will strengthen the firm’s innovation capabilities with new solutions and strong engineering expertise in growth areas such as IoT, wireless and media services. I welcome the Globecomm team to Speedcast and look forward to their contribution to Speedcast’s journey. (Source: Satnews)
28 Dec 18. Dell returns to stock market with $34bn listing. US tech group back on NYSE after five years of private ownership. PC pioneer Michael Dell made his return to the stock market on Friday after a long battle with investors, as Wall Street put a value of $34bn on newly traded shares in his company. The listing on the New York Stock Exchange ended five years of private ownership during which Mr Dell and his private equity partner Silver Lake used financial engineering and heavy borrowing to overhaul the PC maker. The dealmaking, including buying the data storage company EMC for $67bn, led to a mountain of more than $50bn in debt. But Dell’s decision to buy out shareholders in an existing stock, rather than carry out an IPO, triggered a brutal fight over price. Mr Dell estimated that his complex cash and shares offer would be worth $23.9bn to the owners of DVMT, an unusual class of tracking stock that Dell had created to help pay for EMC. In the end, Dell shares began trading on Friday at $46, implying a buyout value of $20.9bn. But this was still more than investors stood to get before opposition from a group of dissidents, including activist Carl Icahn, forced Dell and Silver Lake to sweeten the terms of the offer last month. Mr Dell turned his back on Wall Street in 2013 with a $24bn buyout of the company he had founded while a student at the University of Texas nearly 30 years before. At the time, he accused shareholders of lacking patience for the kind of long-term investment his company needed as it made the transition from PC maker to broader IT conglomerate. At nearly every step, Mr Dell and Silver Lake have faced pressure from investors demanding a larger slice of the rewards from the financial engineering used to take the company private, transform it through acquisition and now take it public again. The controversial round of dealmaking has left Mr Dell firmly in control of a greatly enlarged tech empire. He was projected earlier this year to be left with about half the shares in his newly public company, compared to only 14 per cent before the 2013 buyout. His expanded influence will leave the PC entrepreneur with much stronger control than he had the previous time his shares were traded publicly, and Dell executives have said the company intends to maintain the longer-term perspective it took as a private company. Recommended The Big Read Dell: the tricky maths of a reverse merger Mr Icahn led a revolt over the terms of the initial buyout, eventually winning only a minor concession. Dell later used a controversial financing structure to pull off the $67bn takeover of storage company EMC. The DVMT tracking stock issued to grease the wheels of that deal ended up being valued by Wall Street at about $10bn less than the company had advertised, eating into returns to shareholders. Mr Dell had to fight Mr Icahn again this year as he tried to retire the tracking stock, trading it in for cash and shares in his main vehicle, Dell Technologies. He was forced to improve the terms of the deal last month to avoid it being voted down by investors. The deal paved the wave for shares in Dell Technologies to begin trading on Friday, at a price of $46. Along with $14bn of cash, the share price put a value of $6.9bn on the stock component offer Mr Dell used to retire the tracking stock. He had suggested that the stock component would be worth $3bn more. Most of the value in Mr Dell’s enlarged tech empire rests on an 80 per cent controlling stake in VMware. That investment was worth about $50bn on Friday. The tracking stock had, in theory, been tied to the value of the Dell group’s holding in VMware, but it traded at a substantial discount throughout its life. It stood at less than 70 per cent of its theoretical value before finally being retired this week. (Source: FT.com)
28 Dec 18. Ultra Electronics’ capital under pressure. Ultra Electronics (ULE) has lowered its bottom estimate for full-year cash conversion, setting its range at between 65 per cent and 75 per cent. That is down on an expected range of between 70 per cent and 75 per cent at the time of the defence contractor’s half-year results. The impact on investors’ confidence in the stock has been profound, not least because, based on data from Castellain Capital, Ultra is the fifth-most shorted stock on the London Stock Exchange, with short interest of 11.2 per cent. The group said that it was “experiencing increased working capital requirements arising mainly from the higher order book, underlying revenue growth and a constrained supply chain”. Long lead times for orders have meant that the group has had to get its stock in earlier, while rising demand for electronics is placing strain on the supply chain, according to the group. Despite management’s adjustment to cash conversion forecasts, it has maintained full-year trading expectations. The defence operations generate around 68 per cent of revenues, and the company is encouraged by rising defence spending in the US, where it has significant exposure.
IC View
It has been a tumultuous year for Ultra, which has already had to reckon with the cancellation of a major defence acquisition due to anti-trust concerns, and an investigation by the Serious Fraud Office over suspected corrupt business activities in Algeria by Ultra, its subsidiaries, employees and associated persons. At 1,321p, the shares are trading at 11 times forward earnings, below a three-year historical average multiple of 13. The promise of high order levels and operational improvements by new management kept us hopeful on the group’s prospects, but the high short interest and deterioration in cash conversion means we have lost confidence in the shares. Sell. Last IC View: Buy, 1,710p, August 8 2018. (Source: Investors Chronicle)
22 Dec 18. Brazil judge overturns injunction that blocked Embraer-Boeing deal. A Brazilian judge overturned on Friday a decision that put the brakes on planemaker Embraer’s (EMBR3.SA) proposed sale of 80 percent of its commercial aviation division to Boeing Co (BA.N), as the judicial back-and-forth surrounding the deal continued. According to public news agency Agencia Estado, Federal Judge Therezinha Cazerta suspended a decision which had suspended the sale earlier in the week. Her decision came in response to a request from Brazil’s solicitor general, known as the AGU, which argued that the injunction would hurt the economy and the previous decision represented government overreach into the free market. Legal challenges to the deal, which would reshape the global passenger aviation market, have been plentiful and are common in Brazilian dealmaking in general.
Boeing and Embraer said on Monday they had finalised the terms of the agreement, valuing the Brazilian planemaker’s commercial division at $5.26bn (4.2bn pounds). The agreement needs approval from the Brazilian government because it holds a so-called golden share in Embraer that gives it veto power over strategic decisions and any change in its controlling interest. The planemaker formally sought that approval on Monday and it is expected within 30 days.
On Thursday, a judge issued the now overturned injunction blocking the proposed deal in response to a class action filed by Embraer’s union in Sao Jose dos Campos, where the planemaker is based. Earlier in December the same judge issued a similar injunction blocking the deal, only to see the injunction swiftly overturned. (Source: Reuters)
21 Dec 18. BigBlu’s game-changing deal. Aim-traded BigBlu Broadband (BBB:102p), a fast-growing satellite internet service provider offering an alternative high-speed broadband service, has been named as a preferred partner by Eurobroadband Infrastructure (EBI), a subsidiary of New York Stock Exchange-listed Eutelsat (US:ETL), a global satellite operator that is launching a superfast satellite broadband service to consumers and businesses across Europe with download speeds of up to 50 Mbps. Under the arrangement, EBI will provide satellite network capacity, as well as assisting with subscriber premises equipment, installation and marketing to support its ‘Konnect’ brand. BigBlu will promote and sell satellite broadband services while managing all activities related to subscriber management, including installation, billing and support. Based on a shared growth model, BigBlu will be an integral part of the distribution network over Eutelsat’s KA-SAT satellite. There are potentially 27m European internet users who have internet speeds below 4Mbs, so the target market is huge.
Andrew Walwyn, chief executive of BigBlu, believes the investment EBI is making is a game-changer for BigBlu and its customers by delivering a service superior to most people’s wired broadband at a similar price point for the user. This means that Eutelsat is now BigBlu’s key partner in Europe after an acrimonious divorce between ViaSat and Eutelsat in their European satellite retail joint venture, which has launched services into Poland, Norway, Spain, Sweden and Finland. The terms BigBlu has agreed with Eutelsat are comparable with its arrangement with ViaSat in the aforementioned five countries.
There could even be a kicker for BigBlu now that Eutelsat has decided to compete with ViaSat by launching its own satellite. That’s because ViaSat may decide to buy in capacity from elsewhere ahead of launch of its Viasat-3 satellite over Europe, the Middle East and Africa (EMEA) in 2021 in order to give it a running start. That can only be good news for BigBlu, which provides an obvious route to market, adding further weight to the company’s target of having 150,000 customers by November 2020. It’s making good progress.
In a pre-close trading update earlier this month, BigBlu revealed that it had increased its customer base from 100,000 to 113,000 in the 12 months to end November 2018, which helped deliver a 7 per cent rise in organic revenues. Annual recurring revenues shot up by more than a quarter to £51m to account for 94 per cent of total revenue of £55m to produce underlying cash profits of £6.8m, up from £4.7m the year before, and on an improved margin. Expect another strong performance in the new financial year as the operational gearing of the business really kicks in. Numis Securities pencils in annual revenues of £62m to deliver cash profit of £10.1m and earnings per share (EPS) of 7.3p, rising to revenue of £67m, cash profit of £11.1m and EPS of 11.7p the year after. On this basis, the shares are priced on a 2019 price/earnings (PE) ratio of 13, falling to a PE ratio of below nine in 2020.
I would flag up that BigBlu has the backing of some very shrewd investors. Non-executive director Christopher Mills and parties related to him (North Atlantic Smaller Companies Trust, Harwood Capital and Oryx International Growth Fund) backed a placing at 127.5p a share earlier this year and control 22.6 per cent of BigBlu’s issued share capital. Interestingly, Harwood holds a 28.2 per cent stake in Bioquell (BQE:590p), the provider of specialist microbiological control technologies to the healthcare and life science markets that recently received a £140m recommended cash offer to crystallise a 372 per cent gain for holders of my 2016 Bargain Shares portfolio. Mr Mills is a non-executive director of Bioquell too. Their lead is worth following.
So, having first advised buying BigBlu’s shares at 82.5p (‘Blue-sky tech play’, 21 March 2016), and last updated at the time of the interim results (‘BigBlu targeting ultra-fast organic growth’, 5 September 2018), I maintain my positive stance and conservative-looking 165p target price. Buy. (Source: Investors Chronicle)
20 Dec 18. Israel: Does Elbit’s Rise Mean IAI’s Downfall? “Before I took office,” IAI chairman Harel Locker said at a recent conference, “(I) realized that if the company did not change, it could collapse within a few years.”
The balance of power in Israel’s arms industry, long dominated by state-owned firms, is rapidly shifting to the private sector. Elbit System’s recently completed acquisition of state-owned Israeli Military Industries (IMI) for US $495 m is just the latest victory in a long-running war. It’s a contest in which the publicly traded Elbit has repeatedly outmaneuvered state-owned rivals that must run every decision past the Israeli government.
No one is more worried than the longtime national champion, Israeli Aerospace Industries. “Before I took office,” IAI chairman Harel Locker said at a recent conference, “I held endless meetings, I read endless documents, and in a very short time (I) realized that if the company did not change, it could collapse within a few years.”
“There is politicization and regulation,” Locker lamented. “IAI has strong markets, but there is no strategy, no growth and profit targets, and with the new FMF (Foreign Military Financing) agreement with the US, the possibility of converting US dollars into local currency will disappear.”
That FMF change is critical: After decades of allowing the Israeli government to spend about quarter (26.3 percent) of their US loans on Israeli firms, converting dollars to shekels, the US government is now requiring all Foreign Military Financing to be spent in dollars by 2028. To survive the shift, Israeli companies are creating US subsidiaries to capture contracts. But the state-owned firms have been slower to adapt, with IAI’s US subsidiaries struggling for a foothold while Elbit’s subsidiaries thrive.
It’s not just the US market, either. After years in which the Indian market for drones was dominated by IAI, Elbit is now breaking in. Elbit and India’s Adani Defense & Aerospace have a joint venture in Adani’s industrial park near Shamshabad, where the two companies will build Elbit’s Hermes 900 and Hermes 450 drones outside Israel for the first time, targeting international markets. Worldwide, the authoritative Stockholm International Peace Research Institute (SIPRI) now ranks Elbit as the No. 28 defense firm, compared to IAI at 41, down from No. 33 in 2016.
For the third quarter of this year, IAI reported it had 14,000 employees, total sales valued at US $882m, and a net loss of $21 m. Elbit reported 13,500 employees, $895m in sales — and a net profit of $69.8m. The only area where IAI’s ahead is in its backlog of orders: $12.5bn versus Elbit’s $8.1bn.
And those numbers are all from before Elbit bought IMI for $495 m. Elbit will pay the government an additional $27m if IMI beats certain undisclosed performance targets — something which at least one observer suggested to Breaking Defense creates a conflict of interest for the government.
IMI is already competing with state-owned Rafael (No. 45 on SIPRI’s list) to build Active Protection Systems for US Army armored vehicles, designed to shoot down anti-tank missiles and rockets in flight. With the merger, IMI will now have help from Elbit’s extensive US subsidiaries. In Israel, meanwhile, the merger gives Elbit access to IMI’s line of long-range surface-to-surface missiles, allowing it to compete with IAI for an Israeli Defense Force contract valued at $1bn US.
IAI sources told Breaking Defense that while the new chairman and president are working hard to turn around a “heavy ship,” they don’t have adequate experience: “Running such a company in a growing international competition requires above all business experience, and that is lacking.” Both current and recently departed IAI staff agreed that only a rapid 180-degree turn will enable IAI to compete in the global and Israeli markets.
But there’s tremendous resistance to change at the state-owned company. When Prime Minister Benjamin Netanyahu recently proposed to sell 25 percent of IAI’s shares — currently all controlled by the Israeli government — on the open market, he met with fierce objections from the IAI’s powerful workers’ committee. The committee has also blocked efforts to lay off even one hundred employees.
The former chairman of that committee, Haim Ktaz, is now welfare minister in Netanyahu’s cabinet, while the current chairman, Haim’s son Yair Katz, leads some 14,000 workers, a powerful bloc on election day.
So while an IAI spokesperson told Breaking Defense the company will continue to provide Israel with top-quality technology “as we have done in recent decades,” anonymous sources were more cynical.
“For 15, years the Israeli government tried to privatize IMI,” one said. “At the end it was bought by Elbit. Will this be the result for IAI too?” (Source: Defense News Early Bird/Breaking Defense)