Struggling state arms-making conglomerate Denel is about to begin unbundling core divisions in the most radical restructuring since its establishment in April 1992, Financial Mail reports in its March 17 edition.
In the next 12 months, the group will break up and refocus its aerospace, artillery and munitions divisions into between six and 10 independent subsidiaries, some with substantial private equity, chief executive Shaun Liebenberg told the financial weekly.
He hoped to complete the transformation within five years.
The move signals a return to privatisation of Denel for the first time since the government called off a partial merger with multinational BAE Systems in 2003, Financial Mail said.
Finance minister Trevor Manuel has budgeted R2-billion to help rescue Denel, which made a record R1,6-billion loss last year.
Liebenberg predicts a further operating loss of ”at least” R750-million, ”probably closer to R850-million” in the year ending March 31.
He attributes the increased deficit mainly to the cancellation of a R2-billion to R4-billion sale of G5 cannons and other weaponry to India.
The deal was cancelled after India accused Denel of irregularities in an earlier sale of anti-material rifles. Denel denies wrongdoing, but the matter remains unresolved.
The loss of India’s custom, and knock-on damage to the country’s export reputation, has sent shock-waves throughout South Africa’s defence industry.
Denel accounts for about 55% of the country’s revenue from weapons, and about 1 200 smaller contractors and service providers depend on Denel for business.
This year’s R2-billion bail-out from the treasury is just the first tranche of what Denel hopes will be R5,1-billion for its turnaround plan over the next five years.
Cabinet has approved the plan, but has not guaranteed further payments. Those were left to the treasury to decide, and will depend on Denel achieving stringent performance targets.
Liebenberg said 70% of the first R2-billion would be spent cleaning up the divisions’ finances and processes to make them more attractive to prospective partners.
The second phase will focus primarily on ”future investment” — mainly plant, equipment and research and development.
”Denel’s activities are far too varied from a financial, process, supply-chain and procurement point-of-view for these businesses to be managed as a single entity,” said Liebenberg.
”What we did wrong with Denel was to try to centralise and manage everything with a single mindset,” he said.
Under the recapitalisation plan, cabinet has mandated the Denel board to pursue equity partnerships and alliances with suitable companies that would in effect privatise some divisions.
Some of these partnerships would be allowed to reach 70% private ownership, though remaining under the Denel umbrella.
”Government is committed to the strategy that the Denel of the future will be a 100% state-owned investment holding company, Denel Ltd, which will be the curator of the government’s investment in the defence industry,” said Liebenberg.
”Below this, Denel will, in three to five years, be made up of clustered technology businesses — some of which might be 100% Denel-owned, while others could be as low as 30%.”
Liebenberg said the extent of state-ownership had not been prescribed for the subsidiaries.
”It’s going to depend on our capability to attract the right equity partners and on the protection of our intellectual capability, and the strategic value in our defence environment.”
Meanwhile, the Denel group plans to begin laying off about 700 of its 10 000 employees across the board — an issue that has already drawn fire from the National Union of Metalworkers of South Africa, which is engaged in discussions with management.
It was earlier feared up to 7 000 workers would have to go.
Some of these discussions have focused on a comprehensive transformation plan, which is being drawn up for board consideration in early May. — Sapa