A merger between Israel Military Industries and Rafael Advanced Defense Systems would cost at least NIS 1 billion, said sources in government circles yesterday. The Finance Ministry means to force Rafael to bear the severance costs of more than 1,000 IMI employees heading for early retirement, the sources add.

Based on an estimated severance cost of NIS 1 million per employee, that alone comes to NIS 1 billion, the sources said. Rafael is well aware of the ministry's intent, and has the wherewithal to handle the outlay, they added.

Business sources on the other hand think Rafael may face merger costs of at least NIS 2.2 billion. That higher projection is based on anticipation that the Histadrut labor federation will not back down an inch from its conditions for allowing IMI's privatization to proceed. Its demands, including a safety net for future layoffs, would cost NIS 2 billion.

Both Rafael and the IMI are government companies. The same business sources surmised that Rafael is thinking of forcing the government to share the costs by simply scaling back its dividends, which amount to 50% of net profit.

Rafael commented that it is prepared to merge with IMI but will not elaborate until it has seen a government resolution to that effect and studied the implications.

Indeed, it isn't a done deal: This week a joint working group from the defense and finance ministries recommended that IMI be merged with Rafael, rather than be acquired by the Israel Aerospace Industries, Elbit Systems or some other party. The IAI for one is expected to do everything in its power to prevent the recommendation from becoming government policy.

The final decision on IMI's fate is to be reached Thursday in a three-way meeting between Finance Minister Yuval Steinitz, Defense Minister Ehud Barak and Histadrut chairman Ofer Eini.