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Major Israeli Defense Merger Dropped
The Media Line Staff

Jerusalem, Israel

Ambitious plans to merge two of Israel's key state-owned defense makers in order to end cutthroat competition and costly duplication have been dropped and the government is moving to privatize one of them.

Israeli Defense Minister Ehud Barak and Finance Minister Yuval Steinitz have agreed to sell the troubled Israel Military Industries (IMI) after months of negotiations to merge it with arms maker Rafael failed, defense executives told The Media Line.

"Rafael just wasn't interested," said the executive, who asked not to be further identified.

Ronit Eckshtain, a spokeswoman for IMI, confirmed that the deal was now "off the table" and that Barak and Steinitz were now moving toward privatizing the state-owned industry, which was named 98th in a list of the world's top 100 defense companies by Defense News just two weeks ago.

One of the biggest obstacles has been the Histadrut labor federation, whose cooperation would have been needed in order to implement the staff cutbacks needed to make the merger work.

Cloaked equally in legend and secrecy, Israel's defense industry not only supplies the military with cutting edge technology, but plays a key role in forming strategic relations with other countries; and acts as a seedbed for civilian technology. It developed the legendary Uzi submachine gun and pilotless aircraft (drones), and made Israel one of the world's leading arms exporters.

But how much Israel exports - and often to whom - is subject of much dispute. The U.S. Congressional Research Service (CRS) estimates that Israeli arms exports between 2006 and 2009 amounted to $4.4 billion, but Israel says that in 2006 alone its sales were $4.6 billion. But even by CRS's conservative estimate, Israel is the world's seventh-biggest arms exporter.

Behind the glitter, IMI has been ailing for a long time. It employs some 3,500 people and sells everything from rocket propulsion systems to training in counter-terrorism. But the company has registered nearly a dozen years of consecutive losses and has required billions of shekels in annual bailouts. It racked up $508 million in sales last year, but is reportedly shouldering a $560 million debt.

Now that the merger is off of the table, the defense and finance ministers have embarked on urgent moves to secure emergency loans, reportedly up to $25 million, just to enable IMI to pay July salaries and purchase raw materials.

The Ministry of Defense declined to comment on the matter.

Rivalry among Israeli defense companies is strong and there are many who would like to get hold of IMI's technology and other prized assets. One such competitor is Israel's largest private sector defense contractor, Elbit Systems, the 33rd largest in the world with over $2.3 billion in sales last year.

Israel Aerospace Industries, another state-owned defense company and the 36th largest in the world, has also been eyeing IMI and had been fighting a rearguard battle to undo the merger efforts with Rafael.

Rafael, the world's 46th largest defense firm, is financially sound and wracked up $1.8 billion in sales in 2010. Even when talks of a merger became public in January, many eyebrows were raised at word that Rafael would be interested in swallowing IMI whole.

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