“The IMI Privatization Process will be Completed by the End of the Year”

For more than 20 years there was talk about privatizing IMI and now it is actually happening,” says Meir Oren, the person in charge of the privatization process on behalf of Israel Military Industries (IMI) in an exclusive interview to Israel Defense, conducted at the peak of the process.

The privatization process is managed by the Government Companies Authority (GCA) with the intention of obtaining the highest possible price for the Company. Today, IMI is a government-owned company, Israel’s fourth largest, with a backlog of orders of more than US$ 2 billion.

Oren serves as IMI’s VP Finance. According to him, even he was surprised by the number of groups enrolled in the competition for the acquisition of IMI last May: not less than 12 competitors.

While the process of selecting the company that will acquire IMI is ongoing, IMI, headed by CEO Avi Felder and Chairman of the Board Ehud (Udi) Adam, is busy establishing a new company, titled IMI Systems (which is to be sold free of the debts of the “old” IMI) and managing the day-to-day affairs of the Company, which has recently completed a reorganization process involving the establishment of new business divisions as well as the development of new products. This year, the overwhelming majority of the Company’s sales involved products developed over the last five years, including accurate artillery rockets with extremely long ranges of up to 250 km. IMI has also initiated a process where the Company’s prized real estate in central Israel will be evacuated and the Company will transfer the lion’s share of its operations to the Negev region of the southern Israel.

According to the rules of the tender for the privatization of IMI, other government companies (like Rafael or IAI) cannot compete for the company being privatized. For details about the 12 bidders – see inset, page 55.

So where do we stand in the privatization process?

“In fact, the preparations for this process had begun even before the decision to privatize (IMI) was made. These were maturation processes vis-à-vis the authorities involved: the Government Companies Authority, the Ministry of Finance, the Ministry of Defense and IMI management. As far as principle agreements with the employees and the trade union are concerned, we started the process back in 2013. In the past, this was one of the factors that hindered the privatization process. This time, we reached agreements with the employees pursuant to lengthy negotiations.

“Additionally, much serious thought had been done before the decision to privatize was made. Eventually, a guideline was decided upon that should balance between the Company’s ability to develop and take advantage of its potential after being privatized and the interests of the defense establishment, like dealing with strategic or confidential activities the State does not want to privatize. Eventually, a combined privatization outline was adopted that can fulfill all of the needs of the parties involved.

“Among other things, the outline goes into detail even with regard to the purchasing by IMOD from IMI after it has been privatized and the arrangements for the real estate the Company will possess.

“The decision issues very clear guidelines for the process. Once the decision was made, everything that had matured over a long period of time moved on to actual execution.

“A short while after the decision was made, agreements were signed with the employees, which guarantee their cooperation with the entire process. It’s not just a privatization process – it is a very complex process that includes elements that are not necessarily associated with the actual privatization, like adapting the personnel to the scope and type of Company activities: about one third of the Company’s employees will retire. In their place, new employees will be recruited for the technologies the Company needs. Financing was provided for the benefit of the employee retirement process. 

“The issue of relocating to the Negev, with or without privatization, is a part of the package. Also arranging for future purchasing by IMOD, and the required production lines that were organized. all that will cover the years 2014-2018. It is very important for the Company and for the defense establishment. It is important for the defense establishment’s ability to plan moves through a long-term perspective. The agreement signed with IMOD is being implemented even as we speak.

“In May 2014 we initiated the employee retirement plan. So far, about 1,000 employees have retired out of 1,200 planned to retire. By the end of this process our net personnel will stabilize around 2500-2600 employees.”

What are the principles of the privatization process? Are there any limitations as far as the acquiring party is concerned regarding sources of capital, company structure following the privatization and so forth?

“The company eventually offered for sale is not the present company. From a legal point of view, it is a different company. We have recently established a company under the name IMI Systems – which is the one to be sold. It has been legally registered. The business activity of IMI and all of the business relations and obligations will be transferred to IMI Systems. Everything is taking shape. It is, in itself, a massive project. Ostensibly, it is a legal-technical process, but in fact it is a massive undertaking.”

And as far as the employees are concerned, will they be transferring along with their (accrued) seniority terms?

“Yes. The employees will transfer with all of their privileges and seniority terms. As far as the employees are concerned, the transition is very beneficial. The process is completely transparent to the employees.

“We conducted the entire privatization process while completely separating the business operations from our past liabilities, which are irrelevant. The entire history of debts owing to pensioners, legal exposure and environmental issues that are not directly related to the business operations remains with the old IMI, as the organ that integrates the processing of those issues on behalf of the State. The new IMI, in this configuration, will focus on the business operations. This is based on the understanding that no private business will agree to adopt such a ‘black hole’. This could have scared potential purchasers. One other thing, the new company will devote whatever is necessary to business, including executives who in the past were involved in numerous activities but not in business operations.”

As far as technology and products – is everything being sold?

“All of our activities are being transferred, with the exception of the rocket propulsion activity. This activity, which is a part of the operations of the current ‘Givon’ Rocket Systems Division (RSD), will be transferred to a new government company titled ‘Tomer’. This company will provide the defense establishment with heavy automotive platforms, as well as providing IMI with heavy automotive platforms for its artillery systems. The armored combat vehicle activity (‘Slavin’ division) and the various ammunition plants will be transferred in whole to IMI Systems.”

And the Company, IMI Systems, will remain active for how many years?

“IMI Systems is a full-fledged company that will be sold as a single entity. How it will be organized and run in the future – that depends on the party acquiring it and their future plans. The decision to privatize includes a demand to operate the Company as a going concern for a number of years. The actual period was not listed as a specific number of years, but it is also a part of the commitment vis-à-vis the agreements with the employees. Any subsequent sale made during that period must be agreed upon with the employees. There is an agreement regarding the demand to maintain the Company in its present format as an organizational unit, at least for the next few years. We hope that the Company is retained, as the brand is valuable.”

Isn’t the reduction of the number of industries in the market one of the objectives of the privatization process?

“This is not one of the objectives of the privatization process. We should allow the market forces do their work so as to regulate the competition between the industries. I do not think the objective of the privatization process was to determine or influence the structure of the competition in the Israeli defense market.

“The contractual obligation of the acquiring party vis-à-vis the State is to maintain the Company as a going concern. The sales agreement includes an unspecified period of time – more on the commitment level. The State will also take these things into consideration when it eventually decides who the acquiring party would be. This additional thing had been agreed upon with the employees – maintaining the existing structure for at least five years after the privatization, from the time when the Company has been privatized.”

What is the timetable for the subsequent stages of the process?

“Formally, the process was started up in March 2015 when advertisements calling for the registration of applicants for the process were published. In May 2015, proposals were submitted by 12 organizations – financial organizations, major industrial organizations from Israel and overseas and organizations with extensive industrial experience (not necessarily in the field of defense). It is a very interesting gallery of potential purchasers.

“The next stage is scheduled for July. The initial screening should be completed by then. We are waiting for the decision of the GCA and IMOD. The GCA checks the history of the bidding company and runs a preliminary review of its financial capability. IMOD checks that the bidding company is not an organization that just wastes its time. Eventually, those organizations that receive the ‘green light’ will engage in a due diligence process. We will open information rooms on July 1, 2015.”

Were you surprised by the massive response?

“I was not surprised by the level of interest, it had been like that even before this process. The Company offers a tremendous potential which in the past could not be realized. It is natural for various organizations to identify that potential. A major leap may be accomplished with this Company, technology-wise. We believe in the privatization process mainly for this reason.”

Who will eventually decide the identity of the acquiring party?

“The Government Companies Authority, which includes a formal organ in charge of privatization. There are some significant elements involved here, owing to the defense orientation of the Company. To my understanding, the process will be about the price – that is the primary criterion. It is a major move, beyond the Company’s activity itself, like the evacuation of Ramat HaSharon and the relocation to the Negev. The Company is committed to the relocation to the Negev.”

What about the aspects of soil decontamination?

“These elements are dissociated from the Company. They are associated with the old Company. This issue is associated with such government organs as the Ministry of the Environment, dealing with the real estate in the localities being evacuated.”

What will be the level of transparency vis-à-vis the interested groups, considering the fact that some of them are already competing against IMI?

“The maximum level to enable an intelligent decision regarding the acquisition of the Company, while balancing the issue of security and business sensitivity. We will use all of the standard techniques in order to provide extensive information but without damaging the Company. Everyone will receive the same information.”

Will there be a process of negotiating?

“The GCA will conduct the process. It is very structured and methodical. There are no indications to the effect that they will deviate from it this time.

“At the beginning of the due diligence process, every participant will deposit a guarantee in the amount of about ILS 6 million (US$ 1.6M) in order to ensure seriousness and information security. Once the due diligence process has been completed, a process of signing sales agreement vis-à-vis the State will be carried out. A second guarantee of ILS 35 million  (US$ 9.3M) will be deposited and binding bids will be submitted. The GCA normally engages in a process of elicitation with the organizations signing the sales agreements.”

So the bid may be raised at any point? Is it like an auction of sorts?

“Yes. You may say that. The bid may be raised.”

Will the money paid for the sale go to the State treasure?

“Yes.”

What can you say about the companies that submitted a request to bid? How serious are they?

“Most of the applicants are well-known organizations. Whoever entered this process knows that the matter at hand is a serious one – a lengthy process in which you must invest a lot of money and time.”

Are coalitions legitimate, as far as you are concerned?

“The process allows it. A coalition is acceptable as far as the security aspect is concerned.”

Is there any reason why the new owners should not be foreign?

“Ownership may be traced up to foreign organizations. The privatization decision allows it. The company holding IMI directly will be Israeli, namely – even if a foreign organization has to establish an Israeli company over here. 10% of the Company’s ownership/management/capital will be Israeli eventually. The center of the business activity of IMI will remain in Israel. The board of directors and the management will remain in Israel.

“The Company is subject to the directions of IMOD and that is how it will remain. The State will have the power to determine or authorize the acquisition of ownership and any change in ownership. Any acquisition made without authorization will not be legally valid, neither toward the seller nor toward the acquiring party. As far as the board of directors and executives are concerned, they must be Israeli inhabitants and citizens who were vetted for a security clearance. Directors not possessing a security clearance will not be allowed to participate in discussions concerning defense/security issues. Everything will continue to operate according to the directions of MALMAB (the IMOD agency in charge of security within the defense establishment), as it does today. Every company that is a defense industry is subject to MALMAB.”

A part of the idea of merging is to unite divisions, product lines. It is commonplace worldwide. How does it coincide with the agreements you reached with the employees?

“This is the ‘bride’ and whoever acquires the Company knows that it has a problem that he would have to take with him. Other organizations that were acquired also included agreements and limitations. Eventually, they found the configuration that was suitable for those things. These issues are transparent and known well in advance. The rules of the game are well known and clearly defined. The organizations involved know how to enter in this way and benefit from the Company in the best way they can.

“This process is undertaken in cooperation and with the actual participation of the employees. In the past, it was a hindrance – we have seen it elsewhere. Any process you attempt to execute without the employees is extremely difficult to complete.”

In fact, nothing prevents you from initiating merging processes, but they must be done subject to the employees’ agreement?

“Yes. As well as subject to the agreement of the Defense Minister. All of these things must coincide with the interest warrant of IMOD.”

So these are not just interests of information security?

“Both information security and interests of ownership and control. There are specific lines the Company is obliged to maintain for the long run.”

If the acquiring party decides after five years that it is no longer profitable for him to manufacture explosives, yet it is still important for the State. Will the State be able to invoke the interest warrant?

“If the activity had been defined as an activity that is essential to the State, then the State will be able to step in and uphold that activity. But that is a drastic move which, as far as I know, has never been made before. Things are normally resolved through negotiations in the context of the working relations between the supplier and the State. But as far as the State’s ability to control the process and initiate the privatization of a (government) company is concerned, then it has that ability.”

So how long will it take before they decide the identity of the acquiring party?

“In October 2015, the bids should be submitted at the conclusion of the due diligence process. The selection of the winning bidder is planned for the end of this year. The transaction authorization process will not take too long – a month to two months, so that during the first quarter of 2016 we would reach the conclusion of the transaction. Things are moving very fast now.”

When will we see IMI in the Negev?

“First of all, there’s the formal demand that specifies 2022 as the deadline. The motivation for this move is very powerful. First of all, the State wants the real estate here so there is a new motivation that drives toward the advancement of the south. There is talk about an attempt to speed up the evacuation process and begin a gradual evacuation of divisions in Ramat HaSharon and to establish alternate locations in the south as early as in 2019. Land registration processes are in progress in the south owing to the understanding of the importance of this move. The IMOD assumed responsibility for this whole thing. They are the project leaders that should provide the plans and the opportunity to erect the IMI facility in the Negev, owing to the understanding that the IMOD is the most effective organization of all government organizations for such a project.

“The revenue generated from the marketing of the real estate will go to the State. The State will pay IMOD for the activity it performs for the benefit of the relocation. Construction will be IMI’s responsibility. The construction design will be done by the Company according to the Company’s needs. The IMOD gained extensive experience in these activities pursuant to the planning of the Intelligence campus. This thing works. The project is being managed and is taking place according to the timetables prescribed for it. Everything is on the right track and within the appropriate channel, exactly according to the milestones. There general sense is one of optimism as there is a strong desire to see this process materializing and everyone shares the effort.”

All in all, deducting all of the things that remain in the residual IMI – is IMI being sold in a sound commercial state? As far as the new business division structure is concerned – is it attractive?

“The Company is poised at a very good starting point owing to the processes that have taken place. Finally, the Company was allowed to initiate processes that were essential in terms of reorganization and structural changes. As far as the maturation of our product range is concerned, we are in good condition. Our backlog is based on new products. The Company has a backlog of more than US$ 2 billion – which reflects a sales turnover of four years. We have every confidence in the sales forecast for the coming years.

“The sales estimates for the coming years are well founded and based on the existing backlog. Many transactions are being processed. In its present configuration, the Company is in good shape. Naturally, under private ownership it will be able to gain added values that it did not have before in terms of the opening of new markets and investments that were hitherto denied. There is an opportunity here to realize a tremendous potential when the Company is privately owned. Sky is the limit as far as the possibilities are concerned.

“The Company, despite all of the problems encountered in the past, continued to develop products and expand its backlog of orders. It is expected that the Company will become profitable as of the end of next year (this refers to IMI Systems), despite many dramatic things that we experienced over the last few years. The Company underwent major processes in the last two years, which would have been enough for a life cycle of 20 years in other companies. Everything was performed simultaneously.

“The Company never stopped for a moment and dealt exclusively with the privatization process. All of our operations continued at the same time as the privatization process. The process was carried out with minimum interference to the business processes of the Company. We managed to keep our business elements running without interference. The results are as I have pointed out – our backlog of orders has increased dramatically, we completed the development of various products, some of which entered service in the IDF. We are in good condition.”