Troubled Israeli Drone-maker Aeronautics Gets $232 Million Buyout Offer

State-owned Rafael, entrepreneur Avihai Stolero offer huge premium of share price

File photo: Employees clean an Aeronautics Defense Systems Ltd. Aerostar Tactical drone.
Bloomberg

Aeronautics’ brief but eventful life as a publicly traded company appeared to be coming to an end on Sunday after state-owned Rafael Advanced Defense Systems and businessman Avihai Stolero entered into exclusive talks to buy the drone maker for 850 million shekels ($232 million).

The offer valued Aeronautics at 70% more than its share price on the Tel Aviv Stock Exchange as of last Thursday and sent the shares soaring 32% to a 12.30 shekel close Sunday. It was also nearly twice the price that Rafael and Stolero had offered last August, when it was rejected by Aeronautics.

On the other hand, the price is far less than the 1 billion shekel valuation at which Aeronautics went public in a June 2017 IPO.

Since then, the shares have fallen as much as 60% after Israeli police began an investigation in 2017 into alleged violations by the company of arms export controls. Last week, Israel Securities Authority investigator’s raided Aeronautics’ offices on suspicions of insider trading.

Despite the company’s legal issues — and declining sales that left it with a third-quarter operating loss — buyers have been circling around the company for months, causing Aeronautics’ stock to jump more than 40% since December 25.

Besides the previously rejected Rafael-Stolero offer, state-owned Israel Aerospace Industries proposed buying Aeronautics last week for an unspecified price. In addition, investor Aharon Frenkel accumulated a 20% stake in the company last month. Meanwhile, the U.S. private equity firm KKR is in talks to buy Aeronautics’ 50% stake in Controp Precision Technologies, a maker of electro-optical equipment, at a $150 million valuation.

Aeronautics is regarded as innovative, with products that have significant market potential and a talented workforce drawn from relevant Israeli army units. It has benefited from Israel’s reputation as a leading maker of battle-tested unmanned aerial vehicles. The global market for drones has grown rapidly as the technology has improved and armies use them more and more as a means of gathering intelligence and performing other tasks without endangering soldiers. Teal Group estimates the global market for military drones will grow to $16 billion in 2021 from $10.6 billion in 2010.

Under the terms of the proposed acquisition, a joint venture company owned by Rafael and Stolero would buy all of Aeronautics’ shares through a reverse merger and delist its shares. Aeronautics said it had committed to giving the buyers exclusivity during a negotiation period lasting until February 15, with a 14-day option. Rafael will conduct due diligence in the meantime. The deal still requires the approval of both companies’ boards and regulators.

If the acquisition goes through at the 850 million shekel valuation, one big winner will be Frenkel, who could earn 80 million shekels in very short order on his stake. On the other hand, the insurance company Phoenix, which sold him its 5.5% holding for 25 million, missed out on the chance at a 12 million shekel profit.

Aeronautics' troubles with the authorities date back to 2017, when Israel’s Defense Ministry said it had suspended the marketing and export license for one of the firm’s attack drones to a significant customer in a foreign country. The company denied any wrongdoing.

Founded in 1997 under the name NETS Integrated Avionics Systems, Aeronautics manufactures UAVs for military surveillance and defense purposes and for the commercial sector. The company nearly collapsed in 2011, but was rescued by private equity investors Viola, Beresheet and KCPS, which today hold a combined 36% of its shares.