Denel, the loss-making defence parastatal, is to get a government rescue package that could reach more than R5-billion as it struggles to ward off insolvency, to restructure and to attract new strategic partners.
The new funds should clear the way for the announcement of an equity partnership with the Swedish firm Saab involving aspects of Denel’s aerospace business and other transactions, which will involve the Franco-German giant Eads and Eurocopter are expected to follow.
Denel reported losses of R1,6-billion in the year to March last year, and could not generate enough cash to fund its basic expenses. It was also technically insolvent, with liabilities of about R700-million in excess of its assets.
On Wednesday Minister of Finance Trevor Manuel anounced that the corporation would get a R2-billion cash injection this year “to enable it to proceed with the restructuring necessary to achieve solvency and profitability”.
And Minister of Public Enterprises Alec Erwin, whose department is responsible for oversight of Denel, told the Mail & Guardian that recapitalisation totalling between R4-billion and R5-billion would be necessary to complete the restructuring process over the next three to five years.
The new money is in addition to R1,5-billion in loan guarantees agreed to in November, which kept the company’s creditors at bay.
“The R2-billion is an additional expenditure in the current financial year. It allows us to deal with the first phase of Denel’s restructuring and to put it in a position with a degree of positive cash. We’ll deal with the rest of the restructuring over the Medium-Term Expenditure Framework period,” Erwin said. “It gives us the opportunity to now put to bed some very important deals, which we are close to.”
A joint announcement with Saab would probably be made “soon”, he suggested.
Details are still hazy, and officials did not want to be drawn on the precise nature of talks, but tie-ups with major international firms are central to restructuring plans announced by CEO Shaun Liebenberg that see Denel abandoning efforts to produce complete weapons systems from scratch, and instead concentrating on niche areas where it has a competitive edge.
Denel is to unbundle into six or seven separate companies, each of which may have joint venture partners. The aviation division will split into Denel Aerostructures, dealing with airframe manufacturing, and a maintence and support arm. The current land systems division will be broken up into a munitions company, and an infantry and artillery firm. Missile and unmanned aerial vehicles capabilities will be housed in Denel Aerospace Systems. Denel Optronics, which makes advanced weapons guidance systems, will also form a standalone entity.
If talks with Turkey on a major acquisition go according to plan, and a deal can be struck with Eurocopter, the Rooivalk attack helicopter, which has so far racked up massive losses and no international sales, could also be spun off, according to Liebenberg.
“If we are going to unbundle and create independent [proprietory limited companies], we are going to have to make sure that those companies are debt-free. The recapitalisation will help us re-engineer the balance sheet,” he told the M&G.
He said he had put an initial recapitalisation estimate of R5-billion to the national Treasury when he joined Denel, but that some of this would come from the disposal of non-core assets — notably a large property portfolio. Five of the seven potential disposals are “fundamentally concluded”, he added.
Some of the initial R2-billion will go to paying off urgent debt, some will go to tooling up, to handle Denel’s participation in the construction of the Airbus A400M millitary transporter and some will fund product development with existing customers. Some reports have suggested that as many as 7 000 jobs could be cut in the restructuring process, a move likely to be accompanied by robust industrial action.
But Erwin says that figure has been plucked out of context from studies of staffing levels at comparable international firms.
“We don’t envisage massive job cuts. If we can keep the workload going, we’d like to keep as many people as we can. And while there will certainly be some downsizing … we can probably do a lot of that through attrition.”