Denel SOC Ltd
After years of financial misappropriation and bad management at Denel, Denel’s workforce (including all divisions) had fallen from 3,332 to about 2,800. Denel released its financial results for the year ending March 2020 which showed that the manufacturer was all but insolvent, with liabilities exceeding assets by more than R2-billion. Public Enterprises Minister Pravin Gordhan said in May 2021 Denel had a confirmed order book of $11 billion but cannot execute due to its lack of capital and support of suppliers. The government had been unwilling to allow other local and foreign investors to buy into Denel’s divisions.
South Africa's foreign minister said on 10 October 2018 that Saudi Arabia had approached its country to buy a stake in Denel, a state-owned defense company with difficulties. "There have been overtures from Saudi Arabia to buy a stake in our company, which is facing difficulties," she told a news conference. I do not know what these negotiations will lead to when they reach the National Commission on Conventional Arms Control." The committee would discuss the feasibility of a possible deal, including human rights considerations, she said.
Andreas Schweer, chief executive of Saudi military industries, told Reuters earlier that the kingdom was in talks to buy a stake in Denel. He said he expected to complete the first partnership agreements with companies in South Africa by the end of 2018, but did not specify the partners. The Democratic Alliance Party, the main opposition party, said the Saudi offer should be rejected. President Cyril Ramaposa appeared open to the idea of ??bringing in a partner to support Denel when he acknowledged the Saudi offer in Otober 2018.
South Africa's public projects management, which oversees Denel, acknowledged talks were under way with the Saudi firm, but said it was too early to talk about details of any possible partnership arrangements. Company spokeswoman Voilewa Kinga said she was not aware of discussions with the Saudi company or the Saudi government. "Denel welcomes any country looking to South Africa to buy defensive materials," she said in e-mail responses to Reuters questions. South African President Cyril Ramaposa visited Saudi Arabia in July 2018 and later announced that the Saudi government had pledged to invest $ 10 billion in South Africa.
Saudi Arabia made a $1 billion offer to enter into a large-scale partnership with South African state-owned Denel Group, which includes a minority stake in a joint venture with German firm Rheinmetal, AFP reported on Nov. 8, 2018.
South Africa's minister of public projects, Pravin Jordan, said his government was not considering any proposal from Saudi Arabia to buy a stake in state-run Denil, a struggling arms manufacturing firm, after the kingdom offered a partnership offer to Daniel last year, Reuters reported on 22 January 2019. Asked if the government was considering selling a stake in Denel to the Saudis, the minister replied to a question from a member of parliament about the Incatha Freedom Party saying "there is no offer from the concerned country under study." If shares are sold in Denel, this will be done publicly and transparently, Jordan added.
On 27 November 2019 the Portfolio Committee on Defence and Military Veterans held Denel to account on the challenges that are impacting on the defence industry as a whole and to brief the committee on their turn-around-strategy. The Chairperson of the committee, Mr Cyril Xaba said: “Denel’s liquidity challenges and the resultant loss of technical capability and capacity affected the entity’s performance on capital projects raising a question on its ability to meet future requirements of the South African National Defence Force (SANDF).” The SANDF’s acquisition programs comprised 40% of Denel’s order book, hence the future of the entity’s financial stability is of utmost importance. Denel is the main supplier of equipment to the SANDF. The entity also provides ammunition and maintenance on much of the equipment it provides. The committee questioned the entity’s continuous delays in the delivery of the Hoefyster Project which is meant for the revitalisation of the South African Army’s infantry fighting vehicles and several other projects.
The committee questioned the challenge relating to the End-User Certificates (EUC) currently blocking arms sales to countries such as Saudi Arabia and the United Arab Emirates (UAE) while it noted the financial implications on companies such as Denel which could lose up to R30 Billion in sales. According to the National Conventional Arms Control Committee (NCACC), the EUC is an undertaking made by the Government of an importing country whose Government assures the exporting country that controlled items will not be transferred, alienated, re-sold or re-export to any other country without prior approval.
The committee was told that the problem lies on onsite inspection which countries such as Saudi-Arabia and the UAE says are violating their sovereignty. The committee heard that the criteria is not informed by the National Conventional Arms Control Act [73 of 2008], but it is an attachment to the Regulations. The committee was also told that the NCACC got an opinion from the State Legal Advisors and the problem of whether the criteria is to be removed from the attachment to the Regulation will be escalated.
A further problem was Denel’s lack of liquidity, which had contributed to the delays in the Badger programme. It also posed a significant risk to the entire defence industry. Denel had told the committee that, because of legacy debts, it had not paid invoices from its suppliers. As a result, these companies were not supporting the project.
Denel generated cash through trading, but by 2020 R400m worth on invoiced goods could not be shipped due to not being able to get export permits and the lack of international flights. Covid-19 had caused a backlog of work as Denel could not work at full production capacity. Its second income source was through turnaround and strategic initiatives where it worked with international partners, but these organisations were all preserving cash in the face of Covid-19. Its third source of income was recapitalisation and the Minister of Finance had said in February that Denel would receive R500m.
Denel’s reputation had taken a beating during the time of State Capture, but there was still appreciation of its skills, expertise and technology. Its products were wanted. The media stories of salaries not being paid created nervousness. Denel had a turnaround plan and would be meeting with the Committee in June to discuss this.
The Indian Ministry of Defence (MoD) announced on 06 September 2018 that it has formally lifted its defence trade ban on South African defence company Denel. The MoD said the ban was lifted after the “MoD and the South African side” signed a “final settlement agreement” on 19 July 2018. In a statement the MoD said its decision comes 13 years after it blacklisted Denel following South African news reports alleging corruption in a defence contract awarded to the company to supply firearms and ammunition to the Indian Army.
Denel Land Systems is undoubtedly a world leader in the manufacturing of artillery products. Defence forces use artillery to establish fire superiority and to shape the battle area. Artillery firepower is then used in a focussed and selective way, targeting high payoff targets of the opposing forces operating systems both at the operational and tactical levels of war. Denel Land Systems provides artillery products that fulfil the expectations of a modern army involved in both high-intensity warfare and peace-keeping operations.
Defence and technology company, Denel is involved in research and development, as well as manufacturing and product support. It has six operating and industrial divisions throughout South Africa and employs 8,000 people. Denel, is now ranked among the top 100 global defence manufacturers, and the second largest in the southern hemisphere, behind the Brazilian aerospace conglomerate, Embraer, which occupies the 55th position on the global list. The ranking is done by the international publication, Defense News, and based on an analysis of revenue achieved during the 2014 financial year. This is the first time that Denel had entered the global top 100 list in the company’s history.
Denel SOC Ltd is a state-owned commercially-driven company and strategic partner for innovative defence, security and related technology solutions. It groups together several defence and aerospace divisions and associated companies. Denel provides turn-key solutions of defence equipment to its clients by designing, developing, integrating and supporting artillery, munitions, missiles, aerostructures, aircraft maintenance, unmanned aerial vehicle systems and optical payloads based on high-end technology. Its defence capabilities date back more than 70 years when some of Denel's first manufacturing plants were established.
Over the years Denel has built a reputation as a reliable supplier to its many international clients. It supplies systems and consumables to end users as well as sub-systems and components to its industrial client base. Denel also has a number of equity partnerships, joint ventures and cooperation agreements with renowned international players in the defence industry.
On 1 April 1992 Armscor was divided into two separate organisations. A new state-owned industrial company called Denel Pty (Ltd) was established under the Companies Act as a commercial enterprise reporting to the Minister of Public Enterprises. Armscor was thus involved in the production of armaments up until 1992, when its manufacturing capability was transferred in Denel.
State-owned Denel and three large private sector industrial groups - Altech, Reunert and Grintek, dominated the domestic defence market. These four companies accounted for over 90% of domestic acquisition spending at the turn of the century. The remaining 10% is accounted for by hundreds of small and medium firms. Denel and the three large private sector defence-related groups have significantly reduced their dependence on defence sales since the late 1980's. Denel’s share of defence sales in turnover was 64% in 1996/97, down from nearly 80% at the time of its formation in 1992.
Since 1992 Denel’s financial performance (in terms of profitability and asset management) and productivity has not been particularly impressive. The poor performance of the company, particularly since 1995/96, has been a result of the severity of the cuts in defence spending, and the failure of a number of large potential export orders, which did not materialise for various reasons.
Turnover declined in real terms by an average of 1.6% per annum since 1992, while operating profit has declined by an average of 13% per annum during the same period. The company made a net loss (for the first time since its existence) of R72 million in operating profit during 1996/97 and the company’s operating margin (operating profit/turnover) declined from a high of 8.1% in 1995/96 to –2.4% in 1996/97. The company’s net profit declined by nearly 78% in real terms from R442 million in 1995/96 to R95 million in 1996/97 (in constant 1996 prices). The company’s return on assets (net profit/turnover) declined from a high of 6% in 1995/96 to 1.7% in 1996/97.
The dividend that Denel paid to the state, its sole shareholder, also declined by over 80% from R100 million in 1995/96 to R20 million in 1996/97 (in constant 1996 prices). Denel’s total employment has declined by an average of 2% per annum since its establishment in 1992, and total employment in 1996/97 was 14 200, down from 15 500 in 1992/93.
In terms of productivity, the company’s capital productivity, or capital output ratio (total assets/value added) declined by an average of nearly 6% per annum and showed no real improvement between 1992/93 and 1996/97. The company’s labour productivity or output-labour ratio (value added/employment) declined by an average of 6% per annum between 1992/93 and 1996/97, despite slight increases in 1993/94 and 1994/95. The capital intensity of the company, as measured by the capital labour ratio (total assets/employment) declined quite significantly after 1992 as a result of significant retrenchments and a revaluation of Denel’s assets in 1994/95 as a result of the termination of the space program at Houwteq.
In mid-1997, the TFM Defence and Security Division was taken over by Reunert Group and the former's range of products was integrated with Reumech OMC. Late in 1999 Vickers Defence Systems took over Reumech OMC and the company was renamed Vickers OMC. Late in 2002, Alvis PLC took over Vickers Defence Systems and the latter company became known as Alvis Vickers. The South African company of Vickers OMC was part of this deal and this company was renamed Alvis OMC. Late in 2004 Alvis Plc was taken over by BAE Systems and Alvis OMC was renamed BAE Systems Land Systems OMC.
In the WHITE PAPER ON THE SOUTH AFRICAN DEFENCE RELATED INDUSTRIES of December 1999, Government’s preferred restructuring option was to break up Denel as a single corporate entity and sell off less than 100% of the shares in each cluster (e.g. aerospace, heavy ordnance, light ordnance) or divisions as separate entities.
Those clusters or divisions that were easy to privatise, or those defence-dependent divisions, which are attractive to local and foreign investors, will be restructured first. The revenue from these sales will be used to restructure the remaining divisions in order to prepare them for the market. Given the high degree of inter-linkage that exists between most of Denel's divisions, selling off clusters or divisions as single corporate entities, might make it difficult for many divisions to survive, which in turn might reduce their attractiveness to prospective investors. This approach to utilise the funds realised, might however be problematic in that the Treasury may be unwilling to allow the proceeds from the restructuring of some divisions to be used to finance the restructuring of other less 'attractive' divisions.
The restructuring of Denel may involve a number of different, or complementary strategies such as a public share offer, various different types of employee ownership schemes, a sale to a single local or foreign investor or strategic equity partners, management share options or preferential share options for disadvantaged groups (as in the case of Telkom and Airports Company).
On 28 April 2015, BAE announced the sale of its 75% stake in Land Systems South Africa (LSSA) to Denel for R641 million ($53 million) in cash, although the complete acquisition cost Denel R855 million, as it also bought the remaining 25% stake from BAE Systems’ partner DGD Technologies.
In July 2015 BAE Systems Land Systems South Africa (LSSA) was rebranded as Denel Vehicle Systems (DVS) following its takeover by the state owned Denel Group, which was positioning DVS to focus on the international market. The acquisition gave Denel the ability to maintain and overhaul the whole logistics fleet of the South African National Defence Force. From the landward perspective, Denel is now able to manufacture all vehicle types covering firepower, mobility and support, allowing Denel to provide a full turnkey solution. The whole landward mobility capability of the SANDF is now invested in the state as DVS, Denel Land Systems, Mechem and Land Mobility Technologies (LMT) are under one roof.
DVS has not dropped any vehicles since the takeover by Denel, with the core lineup being the RG-12, RG-21, RG-31, RG-32, and RG-35.
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