BEN GURION AIRPORT, Israel (Reuters) - State-owned Israel Aerospace Industries (IAI) believes the need for a public share offer is becoming urgent as the country’s largest defense contractor wants to make acquisitions abroad to enable it to better compete in foreign markets.
The 64-year-old company, which helped pioneer the development of military drones and also produces satellites, missiles and radar systems, is already planning to acquire companies and set up subsidiaries in countries like India and the United States, where protectionist policies demand that defense spending increasingly benefits local industry.
Chief Financial Officer Eyal Younian said that to help finance acquisitions the government should move ahead soon with plans to sell a 20 percent stake in IAI on the Tel Aviv Stock Exchange.
He said IAI currently needs to issue bonds or borrow money from banks and pay interest of 3-4 percent. An IPO would raise new capital, reducing the need to borrow.
“We cannot support the line of credit that we need for our businesses. The regulations in the banks in Israel and around the world limit us and we cannot support our backlog (of orders),” Younian told Reuters.
In addition, many private contractors in Israel and overseas receive government subsidies but being state-owned IAI is ineligible and the rules should be changed, Younian said, pointing out that local rival Elbit Systems (ESLT.TA) pays corporate tax at a rate of 6 percent while IAI pays 24 percent.
A senior government source with knowledge of the matter estimated IAI’s equity value at $3-$4 billion but said an IPO could not take place until a new chairman is appointed. The timing of that remains unclear, but the source said the earliest there could be an IPO was in 2018.
IAI has annual sales of about $3.7 billion and its backlog of orders exceeds $9 billion.
While the share offer will be in Tel Aviv, the next step could be a dual listing for the shares in the United States, Younian said.
IAI must already submit financial reports to the bourse, where its bonds trade </ILARSP3=TA>, as well as report to the government’s Companies Authority.
Accounting for up to half of Israel’s defense exports, IAI had mostly grown internally over the last decade, but that is set to change.
“Now we will have to face the fact that countries are protecting their industries, like in India, like in Brazil, like in the USA,” Younian said, adding that acquisitions would allow it to strengthen its foothold.
He noted that in many countries only local companies can bid as a prime contractor. As a result IAI, which exports 80 percent of its production, is limited to being a subcontractor.
IAI already has a U.S. subsidiary but it does not contribute significantly to the company’s production.
“I think our subsidiaries in the States and around the world should contribute much more in the coming decade. This is the strategic directive from the board of directors that we as management need to execute,” he said.
Younian said IAI, which employs 15,000 people, will carry out two “important and material” deals in the next few years related to its target markets of the United States and India, but he declined to elaborate.
With Asia a focus for IAI, the company in February formed a joint venture in India with Kalyani Strategic Systems to build air defense systems and lightweight munitions.
Indian media last week reported that India’s government had given the go-ahead for a $2.5 billion deal in which IAI and India would jointly develop a medium-range surface-to-air missile system.
Eli Alfassi, IAI’s executive vice president for marketing, said IAI was awaiting official confirmation from India but declined to say how much the deal was worth.
IAI is also waiting for Israel’s government to decide on whether to progress with a long-term satellite program after its Amos-6 communications satellite was destroyed when a SpaceX launcher exploded in Florida in September.
“We are hoping to build Amos-8,” said Ofer Doron, head of IAI’s space division. “It’s under discussion right now.”
Talks also involve Spacecom (SCC.TA), the operator of the Amos satellites. Amos-8 would cost hundreds of millions of dollars and be ready for launch in about four years.
Editing by Greg Mahlich