Rheinmetall Buying Majority Stake in Denel Munitions
In September 2005, “South Africa’s Denel Forced Into Strategic Shift” examined the changed business landscape for the firm, which was suffering from the collapse of its domestic arms market as a source of guaranteed funding, and a flood of red ink on its balance sheet. The turnabout has been slow, but the firm’s leadership has made it clear that global alliances and sub-contractor status, with a prime role in its domestic market, is the way forward for them.
One of the product groups Denel has always been known for is its artillery systems, which may be the best in the world. Their accurate G6 155mm howitzers continue to outrange all competitors, and the base-bleed ammunition technology they pioneered has become a widespread option for countries looking to extend the range of their existing artillery systems. Industrial partnerships with Rheinmetall and Diehl BGT Defence of Germany have led to orders to supply Germany’s 155mm howitzer and 120mm mortar ammunition, and partnerships have also been explored with General Dynamics in the USA.
Despite their difficulties winning international sales with a superior product, Denel isn’t quite ready to give up its artillery system crown jewels just yet. On the ammunition front, however, business partner Rheinmetall’s move to combine the 2 firms’ customer coverage and technologies has met with a warmer reception.
Rheinmetall Group is currently negotiating with the Denel Group for a 51% interest in Denel Munitions, a holding company that specializes in heavy caliber ordnance consumables such as artillery projectiles for 155mm and 105mm weapons systems, 60mm and 81mm mortar bombs, and naval ammunition for 76-62mm guns. Holding company Denel Pty Ltd of Pretoria became an independent business unit during Denel’s restructuring, and has 2,000 employees at 5 locations, with annual sales of around Rand 900 million (EUR 90M, $145M). The holding company will continue to hold the other 49% stake in Denel Munitions, making the munitions agreement a joint venture partnership.
Rheinmetall already manufactures a wide range of ammunition, from small arms to vehicle cannons and artillery shells. Most of its distribution is European/NATO, where the prevalence of Rheinmetall cannons on Leopard 2 tanks and other vehicles have made its accompanying ammunition products well respected and widely used. Denel, on the other hand, sells mostly artillery and mortar ammunition. They also set up turnkey ammunition filling plants, in South Africa, Asia, the Middle East and South America. Rheinmetall believes this combination of skills and geographic coverage will create a formidable competitor on the global stage, though it remains to be seen whether German export restrictions serve to offset some of the potential gains beyond Europe.
Some of the German firm’s expertise and methods have already transferred to Denel Munitions through their existing business cooperation, and Rheinmetall apparently expects to invest in further modernization of the South African facilities as soon as its equity stake is finalized. Denel’s Group Executive, Ms Lana Kinley explained the deal from Denel’s point of view:
“This agreement with Rheinmetall ties in with Denel’s turnaround strategy. In fact, as one of the crucial pillars of the strategy, equity partnerships with major global players will provide the Denel businesses like Munitions with world-class technology and skills, operational improvements, market access and scale to best serve its clients.”
In truth, market access is the critical element in this array, and the firm must partner to secure it. With aspects like cultural fit and early-stage integration tasks already assessed and covered by their early stage business cooperation, the foundations appear to have been laid for a successful partnership – and an important milestone within Denel’s new strategy.
Agreement & Key Events
Sept 1/08: The finalized deal comes into effect. Denel release [PDF].
Feb 8/08: Germany’s Rheinmetall Group signs an agreement with Denel (Pty) Ltd, indicating its intention to take a majority equity stake in Denel Munitions. The agreement is signed in Pretoria by Rheinmetall Waffe Munition President Mr Armin Papperger, and Denel’s Group Executive, Ms Lana Kinley.
The agreement signed today is subject to approval from the competition authorities and still tied to various suspensive conditions that need be resolved before the transaction is finally concluded. Rheinmetall release.