Ofer Eini and Yuval Steinitz
Ofer Eini and Yuval Steinitz. Photo by Daniel Bar-On
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Israel Military Industries will be merging with Rafael Advanced Defense Systems, not with Israel Aerospace Industries, recommends a joint working group from the defense and finance ministries.

IAI however is not expected to roll over. Its executives are preparing a counteroffensive based on financial arguments they say contradict the working group's conclusions.

In addition, IAI plans to call on all its political resources such as chairman Yair Shamir, the son of former Prime Minister Yitzhak Shamir. They will also tap MK Haim Katz (Likud ), the chairman of the Knesset Labor, Welfare and Health Committee and the head of the IAI employee union.

The working group is scheduled to present its recommendations to Defense Minister Ehud Barak, Finance Minister Yuval Steinitz and Histadrut labor federation chairman Ofer Eini on Thursday, after which the three are to announce the merger. But political machinations involving Barak and the Labor Party yesterday may delay the announcement.

While the committee may have already reached its conclusions, the conditions for such a merger have yet to be set.

The committee also considered selling IMI to a private firm. Defense contractor Elbit Systems and investor Samy Katsav had expressed interest. Another possibility was floating IMI on the stock market.

The working group preferred a merger with Rafael over IAI due to its stronger financial position. Rafael has better cash flow, higher profits and more financial assets, said a source close to the working group. The group says IMI would be a financial burden on whoever acquired it, so finances were a key factor.

IAI says Rafael looks healthier financially because Rafael receives hundreds of millions of shekels from the state to pay pensions, while IAI pays for this out of pocket. IAI also says it would reap more synergies with IMI than Rafael would, and the two companies already cooperate on many projects.

Workers may face various cuts, and the Histadrut will be asked to agree to changes in conditions for IMI employees. The treasury is expected to offer IMI's workers worse conditions after the merger than if the company had been privatized and sold to the highest bidder.

But the choice of Rafael will lead to lower costs for integrating the new employees, said the sources. IAI has a single collective employent agreement for all employees, which would have led to higher costs, while Rafael has a number of different agreements, and IMI workers could join the newly-merged firm with fewer changes - and lower costs.

In addition, the committee expects more synergies from a merger with Rafael: both firms focus on armaments for ground-based operations, while IAI is involved in aerospace. On the downside, IAI says a Rafael-IMI merger would create an Israeli near-monopoly in certain ground-based weapons systems such as rocket engines. The Defense Ministry says regulators would ensure that Rafael does not discriminate against IAI in such matters.

The merger is seen as a compromise between the Finance Ministry, which wanted to sell IMI to the highest bidder, and Eini, who backed the merger to protect workers' rights and jobs. The treasury estimated the price tag for a sale at $300 million to $500 million.

Other possibilities included splitting IMI into two divisions, one containing defense operations. The defense operations would be merged with Rafael and the rest sold off privately. IAI pressured the state to change this plan.

Also, the treasury realized that IMI had unique technology that made closing it down undesirable. A reorganization and rehabilitation plan for the problematic divisions were what was needed.

As for floating IMI on the stock market, the Government Companies Authority felt it was impossible to offer shares in a company in such financial straits.

The IMI's union praised the decision to merge with another state-owned defense company. The union has been demanding such a solution in the five years since the proposal to privatize the firm was raised seriously. But union head Yitzhak Yehuda said the workers would not compromise on conditions for those forced to take early retirement, as well as for workers staying on at the merged company.

Yehuda said the merger would help Israel meet its defense requirements in the future.

The next fight between the treasury and the union will be over pension and severance conditions, which the Finance Ministry expects to be lower in a merger than if the company were sold and privatized.