Eyeing Foreign Markets, Israel Aerospace Anxious to List Its Shares

The firm, which helped pioneer the development of military drones, is already planning to acquire companies and set up subsidiaries in India and the U.S.

An assembly line of Unmanned Aerial Vehicle at the offices of Israel Aerospace Industries, February 27, 2017.
BAZ RATNER/REUTERS

State-owned Israel Aerospace Industries is anxious to list its shares publicly to help it make acquisitions abroad and better compete in foreign markets.

The 64-year-old company, which helped pioneer the development of military drones and also produces satellites, missiles and radar systems, is already planning to acquire companies and set up subsidiaries in countries such as India and the United States, where protectionist policies demand that defense budets be spent domestically.

Chief Financial Officer Eyal Younian said that to help finance acquisitions the government should move ahead soon with plans to sell a 20 percent stake in IAI for trading on the Tel Aviv Stock Exchange. The next step could be a dual listing for the shares in the United States, Younian said.

The capital raised from an initial public offering would reduce the company’s the need to borrow and save the interest costs it now pays on bonds and bank loans.

“We can’t support the line of credit that we need for our businesses. The regulations on the banks in Israel and around the world limit us and we can’t support our [orders] backlog,” Younian told Reuters.

In addition, many private contractors in Israel and overseas receive government subsidies but, being state-owned, IAI is ineligible and the rules should be changed, Younian said, pointing out that rival Elbit Systems pays corporate tax at a rate of 6 percent while IAI pays 24 percent.

A senior government source with knowledge of the matter estimated IAI’s equity value at $3 billion to $4 billion but said an IPO could not take place until a new chairman is appointed. The timing of that remains unclear, but the source said the earliest would be 2018.

IAI, which has annual sales of about $3.7 billion and an orders backlog of over $9 billion, accounts for up to half of Israel’s defense exports.

“Now we will have to face the fact that countries are protecting their industries, like in India, like in Brazil, like in the U.S.A.,” Younian said, adding that acquisitions would allow it to strengthen its foothold.

He noted that in many countries only local companies can bid as a prime contractor. As a result IAI, which exports 80 percent of its production, is limited to being a subcontractor. IAI has a U.S. subsidiary but it does not contribute significantly to the company’s production. “I think our subsidiaries in the States and around the world should contribute much more in the coming decade. This is the strategic directive from the board of directors that we as management need to execute,” he said.

Younian said IAI, which employs 15,000 people, will carry out two “important and material” deals in the next few years related to its target markets of the United States and India, but he declined to elaborate.

With Asia a focus for IAI, the company in February formed a joint venture in India with Kalyani Strategic Systems to build air defense systems and lightweight munitions.

Indian media last week reported that India’s government had given the go-ahead for a $2.5 billion deal in which IAI and India would jointly develop a medium-range surface-to-air missile system. Eli Alfassi, IAI’s executive vice president for marketing, said the company was awaiting official confirmation from India but declined to say how much the deal was worth.