After more than two decades of intermittent discussion, the cabinet privatization committee on Thursday approved the partial privatization of Israel Aerospace Industries by listing an unspecified minority stake on the Tel Aviv Stock Exchange.
Ministers approved a plan that gives IAI and the Government Corporations Authority 130 day to prepare a plan that not only includes the terms for an initial public offering, but a new collective labor agreement with IAI workers. The shares are expected to be sold at a company valuation of between 10 billion and 14 billion shekels ($3 billion and $4.2 billion).
A defense contractor with some civilian aviation businesses, state-owned IAI is the largest state-owned company by number of employees – about 16,000. It had revenues of $2.1 billion in the first half of this year and a net profit of $48 million from anti-missile systems, drones and precision-guided weapons, mostly for export.
Privatization has wide support both inside the company, including its chairman, Harel Locker, and Yair Katz, who heads the IAI workers’ committee, and among Israel’s political leadership. Prime Minister Benjamin Netanyahu has long supported the idea, and Defense Minister Benny Gantz didn’t express any opposition to the plan. Given the fractured coalition, the vote was a major political achievement.
The Government Corporations Authority warned that leaving IAI as a government-owned company could endanger it, as happened with another state-owned arms maker, IMI Systems, before it was sold two years ago to Elbit Systems. IMI, formerly known as Israel Military Industries, experienced operational problems, stagnating sales and poor profitability. Concerns grew over the quality of its products and it needed repeated injections of government funds.
Gantz said the sale of a minority stake strikes a balance between the needs to improve IAI’s business performance and Israel’s need to protect classified arms technology.
“I have promoted the move together with the ministry’s staff, in a way that balances the need to advance the aerospace industry and its business in world markets, and the need to preserve the capabilities and security interests of the State of Israel and its resources,” he said after the vote.
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The proceeds from the IPO will be invested mostly in a development program for the company that Gantz said would lead to hundreds or thousands of new hires going forward.
The plan calls for selling at least 35% of IAI on the TASE and as much as 49%.
Before that happens, it requires management to reach a new agreement with unions, including a payout for them from the IPO, a confidentiality agreement to ensure classified technology and business activity remains secret and an agreement between the finance and defense ministries over sharing half of the IPO’s proceeds, which are expected to be about 4 billion shekels. The other half will go back into the company.
With the privatization’s approval, the Government Corporations Authority is expected to begin looking for underwriters while negotiations get underway between labor and management. The IPO itself could occur as early as March to April 2021 and promises to be a major event on the local stock market.
IAI management, which has been advocating privatization for a long time, is counting on the IPO to improve the company’s business performance and transparency. Its directors will be appointed by shareholders rather than by the government.
Management also hopes to be able to hire younger workers (the average new employee is 37 years ago) and award bonuses and raises based on performance.
That said, the history of privatized companies hasn’t always resulted in significant improvement in labor relations and management flexibility. El Al Airlines was never able to streamline operations ever after it was sold by the government nearly two decades ago. A publicly traded IAI might even be more sensitive to union threats. In the end, it will depend on the labor agreement that have yet to be reached.
In any case, the IAI privatization promises to advance the sales of state-owned companies, including Israel Electric Corp., the water company Mekorot and Ashdod Port, that have been waiting for the IAI process to get underway.