Antitrust Authority probing Elbit Systems bid for IMI

Michal Halperin

Fears have been raised about the effect of an acquisition of Israel Military Industries by Elbit Systems on other Israeli defense companies and IDF procurement.

The Antitrust Authority has begun to assess the effect of a possible acquisition of Israel Military Industries Ltd. (IMI) by Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT) on the defense market in Israel and on the defense establishment, sources inform "Globes."

The assessment began after the Ministry of Defense granted appropriate security clearance to a team of economists from the Antitrust Authority, so that they can be granted access to classified information relating to the IMI privatization process.

Ministry of Finance Accountant General Rony Hizkiyahu has renewed the procedures for privatizing IMI in recent months after the entire process was suspended for a long period. One of the main reasons that the process was suspended was the investigation by State Comptroller Judge (ret.) Joseph Shapira concerning the way the Ministry of Defense, the Ministry of Finance, and the Government Companies Authority ran it. State Comptroller's Office defense audit division manager Joseph Beinhorn conducted the inquiry, and a draft report was distributed to the audited parties a year ago for review and response. The State Comptroller has yet to publish a final report on the matter.

The investigation began following complaints to the Office of the State Comptroller and various assertions concerning bias in favor of Elbit Systems in the sale processes for IMI.

Elbit Systems, controlled by Michael Federmann, was the only company to make it to the end of IMI sale process. Ten companies and consortia from Israel and abroad that had expressed great interest in acquiring IMI later withdrew. They included Flextronics subsidiary Invictus; FIMI Opportunity Funds; Renco Group; and a consortium of Naska Group, headed by Meir Shamir, and SK Group, headed by Sami Katsav. Shamir and Katsav told Hizkiyahu in the past few months that they would again compete for the acquisition of IMI, subject to obtaining up-to-date figures and information about the state of the company.

Elbit Systems believes that there is substantial synergy between its activity in the development and production of armaments, and IMI's business, and therefore wishes to acquire the company. The Government Companies Authority began negotiations with Elbit Systems over the price for IMI, but people involved in the privatization process expressed severe criticism because of the likely effect of such a deal on the local defense market and the defense establishment.

Complaints were filed at the State Comptroller's Office about improprieties in the privatization process involving bias in favor of Elbit Systems. It was also alleged that one of the companies hired by the Government Companies Authority to value IMI had a conflict of interests, and did not present the company's real value. It was also argued that a possible merger of IMI with Elbit Systems would significantly damage the other defense companies in Israel by making Elbit Systems an arms monopoly, harming the defense establishment, the main customer of these companies in Israel.

Until recently, the Antitrust Authority, led by director general Michal Halperin, had refrained from examining the effect of this process on the defense market, due to lack of security clearance for its representatives. Materials and data relating to the process accumulated by the Antitrust Authority 18 months ago were stored in a safe for a long time, and the teams responsible for considering this matter on behalf of the Antitrust Authority were unable to examine and analyze them, due to lack of appropriate authorization.

Anxiety at Rafael and IAI

The main question being considered by the Antitrust Authority is the effect of an acquisition of IMI by Elbit Systems on the resilience of the other defense companies in Israel, such as Rafael Advanced Defense Systems Ltd. and Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1), both of which are state-owned defense companies.

As already reported by "Globes," IAI and Rafael expressed deep concern to the Government Companies Authority, the Ministry of Finance and the Ministry of Defense about a possible merger between IMI and Elbit Systems. Senior executives at both companies have made it clear in various forums that such a merger would have a major negative effect on the weapons market, and would detract from their profits.

IAI is afraid that the two companies' merger would provide Elbit Systems will extensive capabilities in the manufacturing of advanced missiles and rockets. In this situation, in order to narrow gaps that would be created between the companies in this segment, IAI would have no choice but to invest large sums in developing infrastructure to enable it to survive the difficult competition liable to ensue with Elbit Systems following a merger, in addition to Elbit Systems becoming a monopoly in land-based systems, which would have a detrimental effect on IAI's business. Sources at Rafael also expressed concern about a possible merger of Elbit Systems with IMI. Rafael buys components from IMI for systems and weapons it produces in various weapons programs. The sources warned that such a merger was liable to cause a price hike, make Elbit Systems its sole supplier, and greatly damage Rafael's profits.

Sources involved in the privatization process told "Globes" that the Antitrust Authority would not investigate the allegation that after acquiring IMI, Elbit Systems would have excessive market power vis-a-vis the Ministry of Defense, the main weapons purchaser for the IDF and the defense establishment. The sources stated that Elbit Systems did not have excessive power, because an absolute majority of its revenue came from overseas sales. 80% of Elbit Systems' output is exported to dozens of countries around the world, and most of its revenue therefore does not come from deals in Israel. At the same time, the various government ministries are disturbed about the possibility that Elbit Systems would acquire substantial market power following an acquisition of IMI in at least in some types of weapons, such as rockets, thereby significantly reducing the Ministry of Defense's bargaining power against it in future procurement programs. Ministry of Defense sources claimed that the issue involved was marginal, and that an acquisition of IMI by Elbit Systems was even likely to lead to lower prices for the Ministry of Defense. According to these sources, the prevailing opinion in the Ministry of Defense was that there is no reason that Elbit Systems should not acquire IMI.

Published by Globes [online], Israel Business News - www.globes-online.com - on October 19, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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Michal Halperin
Michal Halperin
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