Saab may soon announce a co-operation deal with South African state owned aviation manufacturer Denel Aerospace, according to a Africascan source. Saab confirms that the parties have ongoing discussions, but denies that they are nowhere near a conclusion.
JOHANNESBURG. Saab´s CEO Åke Svensson on Friday 27 October unveiled the first delivery of the Gripen Jetfighter to South Africa in a hangar at Saab´s production plant in Linköping, Sweden.
According to industry sources the plan was also that he, together with South Africa´s minister of public enterprises Alec Erwin, should announce that the Swedish arms manufacturer would take a substantial stake in Denel Aerospace Systems (DAS), the state owned aircraft component manufacturer in South Africa that forms part of the larger Denel group.
That did not happen. But according to Saab there are elaborate discussions.
“Yes, we have said before that we are talking to Denel. We would like to deepen the co-operation with Denel and work with them more and more. It is an ongoing discussion, which is natural as we see South Africa as a home market”, said Peter Larsson to Africascan.
Another spokesperson for Saab in South Africa, Steven Laufer, said that the talks are nowhere near completion.
“Denel is talking to everyone right now”, he said.
Africascan´s sources states that a Denel deal of sorts is in the pipeline. But that Saab is likely to wait until it has assurances from the South African state that it will take care of Denel´s financial mess before it enters any close co-operation.
South Africa´s overall intention is clear. The director-general for public enterprises, Portia Molefe, said on Monday 30 October, to Johannesburg newspaper Business Report, that the ministry of public enterprises is keen to sell off Denel´s non core businesses and to enter joint ventures and strategic production alliances with international firms with market access in the European defence industry.
While Saab prefers to downplay the discussions there is too much pointing towards Saab as a preferred partner.
Saab´s Chairman Anders Scharp and CEO Åke Svensson met Denel in May this year. Further meetings are in the pipeline; a meeting was scheduled for next week, according to Africascan´s information, but it was postponed. Why involve the top leadership, if the discussions have not reached a conclusive stage?
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Saab, most likely, has plenty of insights about Denel as its former CEO Bengt Halse was recently appointed as a Director of Denel.
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Denel´s newly appointed CEO, Shaun Liebenberg, comes from the now Saab-owned aviation technology group Grintek.
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Saab, together with BAE Systems has become Denel´s most important strategic partner.
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• BAE has already walked away from a deal with Denel; Saab is seen as more suitable partner from a size-, corporate culture and political point of view.
Saab is seen as the most reliable of the various arms companies that it signed major deals with in 1999. Saab is an ahead on schedule with its Gripen deliveries and its industrial offset programme has performed better than other programmes.
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South Africa sent Alec Erwin, the minister in charge of sorting out Denel, instead of the minister of defence, to the ceremony in Linköping.
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A stake or a JV with Denel would be interesting strategically as well. Saab would be able to get full support from South Africa in negotiations with other Southern Hemisphere markets where South Africa´s has strong political relations, such as with Brazil and India.
Denel´s Shaun Liebenberg is clear in his statements that he wants to fast-track strategic deals with defence companies, where he has given specific reference to Saab, in order to secure urgently needed funds from the Government.
“It is a deal that South Africa has pushed for a long time. Saab clearly believes that it must do this in order to satisfy its commitments that flows from South Africa´s purchase of Gripen”, comments an industry analyst.
The South African government and Saab know each other very well by now. Saab and BAE Systems won a contract to sell 28 Gripen and 24 Hawk amid stiff competition in a controversial arms deal that was signed in 1999. Saab/BAE committed themselves to deliver offsets worth three times the value of the EUR 1.8 billion (SEK 22 billion) sale of
The cut-off date for the delivery of the offsets is 2011. Any unauthorized deviation could cost Saab-BAE in terms of penalties (10 percent of the purchase price) or the loss of the remaining underlying contracts.
South Africa is, at least publicly, very pleased with Saab-BAE Systems product- and offset delivery so far.
The pair received the highest marks in the assessment of the offsets in a report to the South African parliament in October.
Saab deals with Denel alone though, without BAE´s involvement. The British partner had lengthy negotiations with South Africa up until 2003 to purchase 30 percent stake in the Denel group – but the parties could not find enough common ground to conclude a deal.
What make a deal with Denel´s aviation unit possible now is that SA government has had a rethink and will, under the leadership of new CEO Shaun Liebenberg, accept a piecemeal solution, which is more suitable for Saab.
Saab´s justification to take over or work closely with Denel Aerospace is likely to be that it makes sense for the company to step up the presence in South Africa, as its exposure towards the country is massive anyway. Hence Saabs rhetoric that South Africa is a “home market”.
“Saab is a much more suitable partner for Denel than BAE. It is smaller and Saab and Denel speak a similar language”, says Helmoed Römer Heitman, South Africa correspondent for Jane´s Defense Weekly.
Saab already has a lot of business with Denel already. Denel Aviation produces rear fuselage sections of the Gripen. It also makes the pylons that carry the weapons.
BAE Systems/Saab has contracted the company for design, development and supply of helmet tracking systems for Eurofighter-Typhoon and the export version of Gripen. Furthermore Denel is assembling 23 of the 24 Hawk´s South Africa has bought from BAE Systems.
As a consequence more than 100 South African´s, mostly technicians- and service staf, have already been trained at Saab in Linköping.
If Saab has worries about skeletons in Denel´s cupboard (of which there are likely to be quite a few) it is comforting for Saab that its former CEO, Bengt Halse, has been appointed Chairman of Denel, he became a board member in November last year.
And the newly appointed CEO of Denel, Shaun Liebenberg, was the CEO of Grintek until three months ago.
Denel is in a miserable condition – a number of CEOs have come and left during the past years, each of them leaving a deepened crisis behind. Even the director-general Portia Molefe refers to Denel as “a dead duck, It would be a dud anywhere in the world”.
The Denel Group, an apartheid era arms monger that had to sell arms secretly through dodgy middlemen before the UN arms embargo was lifted, is a major loss maker. In fact the group has been technically insolvent at times during the past year, the CEO admitted to the South African parliament recently. The Denel group as a whole had ZAR 4 billion in turnover in 1994. The loss was then ZAR 377.5 million.
Denel Aerospace, which makes up a substantial part of the Denel group, is probably in better shape than the other parts of the group. The Aerospace division has about 4000 out of Denel´s some 10 000 employees. It generates most of the turnover and profits.
It is not likely, therefore that Saab would pay much for DAS – if anything. Saab, or the Swedish government, may instead promise to source arms from Denel, e g air missile system co-operation between Denel and the Swedish armaments purchasing arm FMV would be fit in snugly.
Helmoed Römer Heitman say´s that a deal between Saab and Denel would make sense, but he would be very surprised if Saab bought all of Denel Aerospace. Rather then a variety of outright purchases and JV´s.
“The bits that Saab should be interesting in are the missiles, the electronic side and UAVs (unmanned aereal vehicles, ed note) not really the assembly side”, says Helmoed Römer Heitman.
A precondition for any deal, Römer Heitman believes, is that the South African government either recapitalises Denel – CEO Lieberman has so far received ZAR 1 billion out the ZAR 5 billion he wants – or it could be more generous with placing firm orders.
There are a number of risks involved that Saab would have discussed with the South African government before it can take on any of Denel´s inherent risks.
One mega-risk is what to do with the South African attack helicopter Rooivalk – a project that was initiated during the cold war-apartheid era. Denel seems to want to scrap the project, which has run into tens of billions in costs for the South African government already.
Alternatively, thinks Römer Heitman, the South African government should place orders on Rooivalk as well as on other projects that already are up and running with order books from various countries – among them Sweden and Finland.
Another matter is if it is wise at all to buy into the name Denel. As late as last month the Indian authorities accused Denel of paying money to middlemen, notably a ZAR 24 million contract to supply rifles and another ZAR 88 million contract to supply ammunition.
The Saab share has developed positively during the past three months, the share price has increased by eight percent to SEK 137.
This co-incides with Saab´s acquisition of the South African aviation technology group Grintek from 21 to 70.3 percent – a deal worth SEK 352 million (EUR 36.6 million, ZAR 293 million). Grintek was subsequently de-listed.
However Goldman Sachs´ verdict on the Saab share in September was that it was underperforming.
How the share would perform, with increased exposure towards South Africa is an interesting one. Saab board and shareholders are probably, unlike Skandia, more prone to accept increased exposure towards South Africa.
Africascan comment:
Saab is heavily exposed towards South Africa; hence it called a “home market”, which indeed is the company´s only firm export market. Other deliveries are leasing arrangements.
And Saab has entangled itself in a massive offset programme that many industry analysts and economists alike are very worried or doubtful about.
If indeed Saab will go ahead and take control of Denel Aerospace, or to take a substantial stake, Saab´s shareholders should need a lot more information. Not only about Denel but also about the exact nature of the offset programme handled by the joint BAE-Saab purpose vehicle Sanip.
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