Elbit Turns Initial Mikal Stake Into Targeted Acquisitions

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In June 2009, Elbit Systems in Haifa, Israel, agreed to pay $18 million for a 19% stake in fellow Israeli defense firm Mikal Ltd., the country’s 2nd largest privately owned defense conglomerate. The Mikal group operates through 3 main divisions: Soltam Systems, which supplies artillery, mortars, and ammunition; Saymar, which supplies armored fighting vehicles; and ITL Optronics, which supplies sensors for soldiers, unmanned aerial vehicles, military vehicles and battle management systems. By August 2010, however, the acquisition had shifted to a targeted buy of several Mikal properties. The move will consolidate Elbit’s position in a number of sectors, offering the prospect of close links between its sensors, targeting systems, UAVs, and front-line battlefield platforms. The Acquisitions Soltam’s ATMOS(click to view full) ITL Optronics: strong synergy, same field. ITL’s systems complement Elbit’s existing Elop subsidiary in 2 main areas: night vision systems based on starlight accelerators; and locating, marking and range-finding for infantry and armored vehicles. The 2 firms have cooperated before in Israel and beyond, and ITL’s eyepiece is used as part of the Elbit Systems Dominator solution for the IDF’s future soldier program. Soltam Systems: some synergy, new fields. Soltam’s strength is artillery, and the targeting systems that accompany […]
Elbit

In June 2009, Elbit Systems in Haifa, Israel, agreed to pay $18 million for a 19% stake in fellow Israeli defense firm Mikal Ltd., the country’s 2nd largest privately owned defense conglomerate. The Mikal group operates through 3 main divisions: Soltam Systems, which supplies artillery, mortars, and ammunition; Saymar, which supplies armored fighting vehicles; and ITL Optronics, which supplies sensors for soldiers, unmanned aerial vehicles, military vehicles and battle management systems.

By August 2010, however, the acquisition had shifted to a targeted buy of several Mikal properties. The move will consolidate Elbit’s position in a number of sectors, offering the prospect of close links between its sensors, targeting systems, UAVs, and front-line battlefield platforms.

The Acquisitions

ATMOS

Soltam’s ATMOS
(click to view full)

ITL Optronics: strong synergy, same field. ITL’s systems complement Elbit’s existing Elop subsidiary in 2 main areas: night vision systems based on starlight accelerators; and locating, marking and range-finding for infantry and armored vehicles. The 2 firms have cooperated before in Israel and beyond, and ITL’s eyepiece is used as part of the Elbit Systems Dominator solution for the IDF’s future soldier program.

Soltam Systems: some synergy, new fields. Soltam’s strength is artillery, and the targeting systems that accompany it. It has exported its products well beyond Israel and is an important supplier of mortar and targeting systems to the US military. Elbit, on the other hand, is not usually a prime contractor, except in the UAV field.

Artillery systems can benefit from integration with other Elbit strengths, ranging from vehicle sub-systems like Auxiliary Power Units (APUs) and fire control, to more integrated tie-ins with UAV spotters, to training and simulation systems, to C4I communications. By acquiring Soltam, however, Elbit Systems moves itself into new territory as a prime equipment vendor for artillery systems and their ancillaries. This may help Soltam get more traction in the international marketplace, as long as Elbit can manage the acquisition of a firm whose orientation and business type differs from most of Elbit.

Managerially, this may be Elbit’s most challenging acquisition, but they also see it as a high-potential buy: “throughout the world there is great potential for large scale projects in the fields of ammunition and mortar, in many countries in all the continents.”

Elbit/Saymar

Saymar: synergies and similarities. This Israeli firm has been described as a fighting vehicle vendor, but other than their HMMWV-class Genda, it would be more accurate to characterize them as upgraders and maintainers. For the past 2 decades, Saymar has worked with platforms including the M113 tracked APC, Brazil’s EE-11 Urutu 6×6 wheeled APC and EE-9 Cascavel, Panhard’s VBL Reconnaissance Vehicle and AML 60/90 heavy fire support armored cars, and the derivative South African Eland 90. The company also manufactures and distributes spare parts and assemblies for a wide range of combat and tactical military vehicles, including engines, transmissions, suspensions, Fire Control Systems (for Light Turrets, Cupolas and Weapon Stations), optics, turret drive & controls, and electrical components.

Elbit Systems plays a similar role in the global aircraft market, so the acquisition should be culturally familiar rather than an “orphan from the outset” situation. Its presence in the Brazilian market is a nice complement to Elbit’s strong fothold, and its role as an upgrader makes it a natural conduit for much of Elbit’s product range.

Contracts & Key Events

Elbit/ITL

April 6/11: Elbit Systems receives a $24 million contract to supply ATMOS 155mm self-propelled artillery and accompanying systems to an unnamed African country. True to the model of an artillery sales as a gateway to accompanying electronics buys, the contract will also include command stations, observation and target acquisition systems, fire control, command and control systems, and training and maintenance over the next 2 years.

It’s a small buy, but it is the first notable Soltam Systems Ltd. contract announcement since Elbit’s acquisition. Elbit has confirmed to DID that the pieces are the standard 155mm version, not the 122mm Russian-caliber D-30S ATMOS variant. Elbit Systems.

Oct 17/10: Elbit Systems completes its acquisitions. It now holds a 100% interest in Soltam and Saymar, and a 87.85% interest in ITL. The balance of ITL’s shares are held by the public, and traded on Tel Aviv’s stock exchange.

Elbit’s 19% share in Mikal was sold to Mikal’s other shareholders, and about $26 million is in escrow, per clauses in the purchase agreement. Elbit Systems.

Sept 2/10: Israel’s Elbit Systems agrees to buy fellow Israeli firm Mikal’s interests in ITL Optronics, Soltam Systems, and Saymar for $87 million, while giving back the 19% stake it holds in Mikal as a whole. Upon completion of the acquisition, Elbit Systems will hold, a 100% interest in Soltam and Saymar, and a 87.85% interest in ITL, which is a public firm. The consideration to be paid to Elbit Systems for its 19% holding in of Mikal’s shares will be $18 million, leaving the deal at $69 million net. If the acquired subsidiaries achieve certain business goals with Elbit, the agreement provides for additional payments to Mikal.

This is in effect a buyout of most of Mikal, with the exception of its Global CST advisory and security contracting arm. The closing of the transaction is subject to certain approvals that the parties expect to obtain in the near future. Elbit Systems

July 29/10: Elbit Systems Ltd. announced its wholly-owned subsidiary, Elbit Security Systems Ltd. (“Elsec”) has modified the Tender Offer to acquire the ordinary shares of I.T.L Optronics Ltd. (“ITL”) held by the public. ITL is traded on the Tel Aviv Stock Exchange.

Elsec increased the price to NIS 6.63 (approximately $1.72) per share, for a total consideration of NIS 11,794,452 (approximately $3.06 million). The ordinary shares of ITL currently held by the public represent 14.37% of ITL’s outstanding share capital, and the Tender Offer will remain open through August 4, 2010. Elbit Systems.

July 15/10: Elbit Systems’ wholly-owned subsidiary, Elbit Security Systems Ltd. (“Elsec”) issues a cash Tender Offer to acquire the ordinary shares of I.T.L Optronics Ltd. (“ITL”) held by the public, currently representing 15.19% of ITL’s outstanding share capital. The Tender Offer period will remain open through August 4/10 at NIS 5.85 (approximately $1.51) per share, for a total consideration of NIS 11,001,434 (approximately $2.85 million) – a 15% premium above the closing price of the share on July 14/10. The Tender Offer will not be implemented if holders of 5% or more of the total outstanding ITL ordinary shares do not accept the Tender Offer.

The remaining 84.81% of ITL’s outstanding share capital are currently held by Mikal Ltd. (“Mikal”) and its wholly-owned subsidiary Soltam Systems Ltd. (“Soltam”). Note that Elbit already holds approximately 19.35% of Mikal’s outstanding share capital. Elbit Systems.

Sept 15/09: Elbit Systems Ltd. announces that after receiving all the appropriate approvals and authorizations, its $18 million loan to Mikal Ltd. was converted to an equity investment per the terms of its agreement. Elbit Systems was also granted the option to purchase the remaining shares of Mikal from the other shareholders, in the course of 2011, for a purchase price to be determined in accordance with an independent external valuation. Elbit Systems.

June 15/09: Elbit announces its initial intent. In the first stage of the transaction, Elbit Systems will loan Mikal $18 million. Once regulatory approvals are received, the loan will be converted to an equity investment, and Mikal will issue approximately 19% of its shares to Elbit Systems. Then, Elbit Systems will be granted the option to purchase the remaining shares of Mikal from the other shareholders during 2011, for a purchase price to be determined through an independent external valuation. The Mikal Group is Israel’s second largest privately owned defense conglomerate, consisting of 19 globally-distributed companies focusing on land-based solutions, systems and products for over 80 countries worldwide. Elbit Systems

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