State-owned Arms Maker Rafael Planning to Sell 20% Stake via IPO

Government wants to boost revenue by selling shares in the company, which reported a $101 million net profit for 2013.

Rafael Advanced Defense Systems is in discussions with the Finance Ministry and the Government Corporations Authority on a plan to sell a 20% stake in the state-owned defense firm in an initial public offering, its chairman, Itzhak Gat, said on Wednesday.

The plans are in line with a government decision to sell not only a 20% stake in Rafael but also of Israel Aerospace Industries, another government-owned defense company. By selling shares to the public, the government wants to increase revenue and set higher standards of transparency and efficiency for the two state-owned companies by exposing them to shareholder scrutiny.

Itzhak Gat, who took over as chairman of Rafael last June, said he was less than satisfied with the company’s net profit margin, which he said should be more than 5% of sales.

On Wednesday Rafael reported a $101 million net profit for 2013, which was 4.9% of its $2.04 billion in revenues. That compared with a net profit of $148 million, or a net margin of 8.3% of sales the year before. A portion of the decline in Rafael’s profitability, however, could be attributed to a drop in the value of the dollar against the shekel and the sale of a joint venture subsidiary in 2012.

Last year Rafael transferred 280 million shekels ($80.9 million) in profits to the government, he said.

This year, the company’s earnings are expected to be boosted by the sale of Given Imaging, a maker of medical equipment in which Rafael owns shares, that is being sold to the Irish company Covidien for $860 million.

Gat said Rafael would seek to enhance its profitability through efficiency measures, but stressed that those would not include layoffs. Rafael is the largest industrial employer in the north of Israel.

Rafael, whose products include land, sea and air military equipment, is the developer of Israel’s Iron Dome anti-missile system, which has been used to protect Israel’s south against Hamas rocket attacks. Gat said Rafael has not yet received orders from foreign governments for the system, although it is actively trying to sell the system. The U.S. government recently announced additional funding to build more Iron Dome batteries for Israel’s use, and production is moving forward.

The company’s over order backlog was $4.36 billion as of the end of 2013, the equivalent of about two years of sales. About two thirds of the backlog is for export orders, primarily for Latin America and Asia, in addition to the United States.

AP