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Defence industry. DENEL UNVEILS ITS PLANS
(Financial Mail Via Thomson Dialog NewsEdge)Defence industry DENEL UNVEILS ITS PLANS CEO Shaun Liebenberg announces a far-reaching restructuring of the state-owned firm Struggling state arms-making conglomerate Denel is about to begin unbundling core divisions in the most radical restructuring since its establishment in April 1992.
The group will break up and refocus its aerospace, artillery and munitions divisions into between six and 10 independent subsidiaries, some with substantial private equity, over the next 12 months, says group CEO Shaun Liebenberg. He says he hopes to complete the transformation within five years.
The move signals a return to privatisation in a diversified sense of Denel for the first time since government called off a partial merger with multinational BAE Systems in 2003.
Finance minister Trevor Manuel allocated R2bn in the current budget to help rescue Denel, which made a record R1,6bn loss last year.
Liebenberg predicts a further operating loss of at least R750m in this year ending March 31 probably closer to R850m. He attributes the increased deficit mainly to the cancellation of a R2bn-R4bn sale of G5 cannons and other weaponry to India. The deal was cancelled after India accused Denel of irregularities in an earlier sale of armour-piercing rifles. Denel denies wrongdoing but the matter remains unresolved.
The loss of India's custom, and knock-on damage to the country's export reputation, has sent shock waves throughout SA's defence industry, since Denel accounts for about 55% of the country's revenue from weapons, and about 1200 smaller contractors and service providers depend on Denel for business.
This year's R2bn bail-out from the treasury is just the first tranche of what Denel hopes will be R5,1bn for its turnaround plan over the next five years. The cabinet has approved the plan but has not guaranteed further payments those are left to the treasury to decide, and will depend on Denel achieving stringent performance targets.
Liebenberg says 70% of the first R2bn will be spent on cleaning up the divisions' finances and processes to make them more attractive to prospective partners settling debts, loans, staff retrenchments and the like.
The second phase will focus primarily on future investment mainly plant, equipment and research & development. Denel Aviation (to be split into two companies) alone needs R400m to modernise and expand production plant and equipment, Liebenberg says.
The unbundling of Denel was the only way to make its components sustainable. Denel's activities are far too varied from a financial, process, supply-chain and procurement point of view for these businesses to be managed as a single entity. What we did wrong with Denel was to try to centralise and manage everything with a single mind set, Liebenberg says.
Under the recapitalisation plan, the cabinet has mandated the Denel board to pursue equity partnerships and alliances with suitable companies that would in effect privatise some divisions though Liebenberg steers away from the word because, he says, he does not want to be drawn into a debate about it.
Nevertheless, some of these partnerships would be allowed to reach 70% private ownership, though remaining under the Denel umbrella. Government is committed to the strategy that the Denel of the future will be a 100% state-owned investment holding company, Denel Ltd, which will be the curator of the government's investment in the defence industry, says Liebenberg.
Below this, Denel will, in three to five years, be made up of clustered technology businesses some of which might be 100% Denel-owned, while others could be as low as 30%. Liebenberg says the extent of state ownership has not been prescribed for the subsidiaries. It's going to depend on our capability to attract the right equity partners and on the protection of our intellectual capability and the strategic value in our defence environment. Meanwhile, the Denel group plans to begin laying off about 700 of its 10000 employees across the board an issue that has already drawn fire from metal workers union Numsa, which is engaged in discussions with management.
Some of these discussions have focused on a comprehensive transformation plan, which is being drawn up for board consideration in early May.
Next month Denel will move its head office from the Pretoria East premises it has occupied for 14 years to refurbished offices in the aerospace facility (formerly Kentron), near Centurion, and shed roughly half of its 200 staff through lay-offs and redeployments.
Denel is in discussion and negotiations with at least 15 potential partners, locally and overseas. The most advanced of these deals is with Swedish aerospace company Saab, to buy a stake in Denel Aviation, the aero-engineering division that is involved in the development and construction of Europe's Airbus A400M transport aircraft and A300-series commercial airliners.
Saab, supplier of the SA Air Force's new Gripen fighter jets, is also in the process of buying privately owned SA avionics company Aerospace Monitoring & Systems for about R30m.
The Saab-Denel tie-up is believed to be nearly complete, with a memorandum of understanding signed. Liebenberg would not discuss the matter, but other industry sources say that Saab will be providing capital and expertise for a stake in Denel Aviation, and would acquire 20% initially, with an option to raise this to 51% over several years. It is likely that the partnership will help to fulfil Saab's offset commitments from the Gripen sale to the SA airforce.
Another advanced partnership deal is with German optical-electronics (optronics) company Zeiss Optronik, to buy into Denel Optronics, which makes state-of-the-art helmet sighting systems and high-grade lenses for missile systems.
Other partnership deals under discussion involve: Negotiations with unidentified partners regarding LIW, Denel's Gauteng-based artillery engineering works best known for the G5 and G6 cannons and gun turrets; Denel Aviation will be split into two entities: Aero Structures and Aero Support. Saab will tie up only with Structures. Aero Support, still in need of a potential partner, will carry the maintenance of helicopter and aircraft already in service in the SA armed forces; Denel Aerospace (formerly Kentron) will also split into two: Missiles & UAVs (unmanned aerial vehicles) and Helicopters SA. Negotiations for a partnership with the former are progressing well. The helicopter company will take over future marketing and manufacture of the precarious Rooivalk attack helicopter project (see story below); Mechem, the Denel division which has done quite well in demining operations around the world, will likely become part of a black economic empowerment deal; Munitions a combination of seven plants under Denel Land Systems in the Western Cape and Gauteng that make light and heavy ammunition, rocket propellants and explosives is running at 20% productivity and is struggling to find a business partner.
Meanwhile, Denel is continuing to sell its noncore businesses about 10 companies including those that deal with soya-based protein supplements, plastic mouldings, domestic electrical components, commercial and residential property, insurance and IT. Liebenberg says the company has sold its 23% stake in state software company Arivia.kom. The department of public enterprises has yet to announce a deal.
Liebenberg says most of the noncore companies have been sold and he expects the remaining few to be hived off in three to six months. He defends the need to sustain Denel, despite the high cost of recapitalisation and the uncertainty of the global defence industry, on the grounds that SA has to retain a strategic and independent munitions and weapons capability, in the light of its peacemaking and peacekeeping role in Africa.
Furthermore, he says, the cost and implications of closing Denel are so enormous that we have to do everything in our power to retain it.
He estimates it would cost at least R15bn to close down all of Denel, if one counted the cost of contract-delivery penalties, environmental clean-up, retrenchments and the like. The penalties for walking away from the Airbus A400 alone would range from R1,5bn to R2bn, Liebenberg says.
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