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Knafaim Holdings, the controlling shareholder of El Al Israel Airlines, is considering bidding on the tender for the privatization of Israel Military Industries. Knafaim co-owner David (Dedi) Borovich expressed the company's interest in the tender in a letter to Prime Minister's Office Director General Eyal Gabai late last month. Knafaim, which is controlled by the Borovich family and Poju Zabludowicz's Tamares investment group, also owns Kanfei Tahzuka, which maintains the Israel Air Forces' planes. Israel Aerospace Industries also owns a stake in Kanfei Tahzuka.

Zabludowicz' father was one of the pioneers of the munitions industry in Israel. In the late 1980s the Zabludowicz family's business stopped manufacturing weapons and switched to investing in real estate.

Other companies interested in the IMI tender include Elbit Systems, Rafael Armament Development Authority, IAI, and Israel Shipyards.

IMI's privatization process was halted after Doron Cohen, the director general of the Government Companies Authority, told IMI employees that the firm's current financial situation made it impossible to float IMI on the Tel Aviv Stock Exchange, and a tender would be issued instead, to sell the company to a private investor.

IMI's employees are insisting that the company be floated when it is free of debt and financially stable.

The main obstacle to IMI's privatization is the disagreement between the government and the company's employees regarding the sum to be allocated as a safety net for the 1,050 workers expected to be laid off.

The government is willing to allocate NIS 300 million. The workers want over NIS 1 billion.

IMI's management offered the workers a security deposit of NIS 670 million, but the employees turned it down. Former Defense Ministry director general Pinchas Buchris has been negotiating with both sides in order to bridge the gap between them.

Over the past few years IMI's financial results have fluctuated between losses and breaking even. In the second half of 2009 the government had to infuse the company with money to pay the employees' salaries, but since the beginning of 2010 IMI has been able to pay salaries from its cash flow, thanks in part to a contract from a Central Asian country.

In addition to IMI's privatization plans, the company's management has drafted a five-year plan aiming for 10% annual internal growth, the restructuring of company to be more customer oriented and to focus on its core products, which include armored combat vehicles, artillery systems and "smart" weapons.

Last month Cohen told a meeting of the Knesset Labor and Welfare Committee that the Government Companies Authority wants to sell IMI via a tender and not on the TASE. Cohen mentioned that he had spoken with the buyer of Israel Shipyards, Samy Katsav, who is interested in participating in the tender and is negotiating with IMI's employees as he did with Shipyard workers.

Issue oversubscribed

Two months ago Knafaim successfully completed an NIS 100 million bond issue (Series B4) that was oversubscribed to the tune of over NIS 220 million, in both the institutional investors tender and the public tender. The bonds are for an average of 4.1 years and bear 4.9% interest above the interest on Gilon bonds, and will be redeemed in eight semi-annual installments starting in February 2013.

Knafaim has other enterprises in the aviation sector, including Global Knafaim Leasing and 50% of QAS, which provides ground services to airlines; VIP lounges at airports and cafes at Ben-Gurion Airport.