A Monopoly in Israel’s Patrol Boat Sector May Be in the Making

Israel Aerospace Industries is offloading the unit that makes the Dvora-class vessel. Israel Shipyards, the maker of the competing Shaldag, appears to be eyeing it

Dvora-class fast patrol boat made by Israel Aerospace Industries.
Israel Aerospace Industries

The Dvora-class fast patrol boat made by Israel Aerospace Industries is used all over the world in places as far flung as Angola, the Philippines and Sri Lanka. Nearly 120 of the vessels, which are made by IAI’s Ramta unit in Be’er Sheva, have been sold over the years, including to the Israel Navy.

For IAI, the boat-building business is an unprofitable sideline to its core aeronautics and aviation operations, so a year ago, the state-owned company decided to shut down the production line and sell the intellectual property.

A key obstacle to doing that was cleared last week when, after an agreement with the workers' committee, the company said it would lay off 80 of the unit’s 300 employees, with the rest moving to its new electro-optics plant being built near Tel Aviv.

The business has begun attracting the interest of players in the Israeli defense industry because only the intellectual property is being sold; the “production file,” as it’s called.

As a result, the price tag will be just a few million dollars, industry sources said. Ownership of the intellectual property will let the buyer sell manufacturing rights to any shipyard in the world. The bidders have been told that any shipyard that wants to build the boats under license will be able to contract IAI to provide operations and maintenance services.

In addition, the company that buys the intellectual property will have the capacity to bid for an Israeli Navy contract for 13 boats worth a total of 1 billion shekels ($290 million) over the next two years.

The basic price of a next-generation Dvora IV boat will be about $10 million to $12 million, while the production costs will range from $5 million to $12 million depending on the missile system the buyer chooses to install.

IAI declined to comment on the sale of the Dvora business beyond saying that “the company is exploring a number of alternatives for operating the Dvora boat [production] line.”

IAI has retained the accounting firm PriceWaterhouseCoopers to manage the sale; the December 10 deadline for bidding was extended to December 31. Several groups made offers, among them one led by Israeli businessman Tomer Avnon, an arms dealer, and an unnamed company from abroad.

However, the second deadline passed without a winner because IAI had decided to wait for an offer from Israel Shipyards. IAI expects to receive a higher bid from the Israeli company.

IAI was careful not to define the sale as a simple auction, saying it retained the right to negotiate with one bidder or multiple bidders and reject any or all offers for whatever reason it chose.

In any case, Israel Shipyards isn’t just another bidder: It makes Shaldag class patrol boats, which are also used by the Israel Navy and are the main competitor for the Dvora in Israel Navy contracts.

“The company is examining purchasing assets belonging to the Ramta factory and will conduct the buying process according to the law, including competition laws,” Israel Shipyards said.

As the bidders await the result of the sale by IAI, the Defense Ministry has ordered three Shaldag patrol boats from Israel Shipyards. Israel Shipyards is the only domestic maker of patrol boats at the moment, so the contract was awarded without any bidding process.

If Israel Shipyards buys IAI’s Dvora business it will have cemented its local monopoly, leaving only foreign makers as potential competitors. As a result, it’s questionable whether antitrust chief Michal Halperin will approve the deal.

Even if Israel Shipyards is ultimately barred, an extended transition period while regulators consider the case would put the buyer at a considerable disadvantage to Israel Shipyards with its Shaldag. The latter company could easily be the only bidder for the navy contract.

The Defense Ministry defended its decision to award the order for three patrol boats to Israel Shipyards, saying it was made after consulting experts, and in any case the contract was modest-sized. “As policy, the ministry acts to strengthen Israeli industry, to buy blue and white, and ensure critical local production,” it said.