Exclusive: Restructuring a key component of bullish Denel’s turnaround strategy


Restructuring for efficiency, establishing joint ventures, and selling shares are some of the key turnaround strategies Denel is implementing, and which it believes will bring the company back from the brink of collapse.

Denel last made a profit, of R395 million, in the 2015/16 financial year. Denel was starting to enjoy the fruits of a successful turnaround when it fell victim to state capture. When the captured board was appointed in July 2015, the Group’s performance immediately started to decline, with Denel posting a R189 million loss the following year, followed by a R1.053 billion loss and then a R1.749 billion loss in the 2018/19 financial year. Its loss widened to R1.96 billion in the 2019/20 financial year.

Due to a lack of progress with the previous turnaround plan initiated in February 2019, Denel launched its 5.Y turnaround strategy, which aims to improve and accelerate the 2019 plan through restructuring into a lean operating model, repurposed for profitability and sustainability. The new business model will see Denel split into Engineering and Maintenance & Manufacturing divisions while unprofitable divisions and entities are exited or transferred.

Interim Denel Group CEO William Hlakoane told defenceWeb in an exclusive interview that restructuring Denel into two divisions from six operating units will save the loss-making Group R240 million a year. He explained that these six divisions were working in silos and not sharing resources – there were a lot of duplications and overlaps, and once engineers had finished on a project, they would often stand idle, whilst they could have been used on other projects in other divisions. The new Denel will be leaner and share resources and services, Hlakoane said.

The restructuring process is underway, and the heavy top structure will be trimmed, and some staff retrenched. However, retrenching staff will cost money and this may take some time. Staff will be contracted back as needed – Hlakoane said it does not make sense to have some capabilities on hand 24/7 when they are seldom needed.

Hlakoane is confident that Denel is on a trajectory towards becoming stable. “It might take a bit of time to reach stability but by July we will have dealt with 60% of redundancies and will be focussing on projects that give us value.”

The other key intervention Denel is making is to sell off assets to generate revenue. Selling stakes in Rheinmetall Denel Munition (RDM) and Hensoldt and trimming the property portfolio could bring in R2.5 billion, Hlakoane said. The Public Investment Corporation (PIC) has been approached to buy some of Denel’s land while offers will be made soon for RDM shares, and this could bring in between R750 million and R1 billion. Hlakoane told defenceWeb that Denel is also waiting for final offers for Hensoldt shares, and hopes to conclude the sale around the end of May or June this year.

While exiting successful joint ventures like Hensoldt South Africa and RDM will generate revenue, it is not a decision taken lightly. Hlakoane believes Denel is caught between a rock and a hard place, “like staying in a house that’s about to be repossessed. We don’t want to sell these subsidiaries but we are sitting in a problem where we need money as in yesterday. National Treasury said we are not going to give you money when you are sitting with jewels in your hand.”

Hlakoane said these assets will be disposed of “with a heavy heart” but Denel’s back is against the wall, and cash is urgently needed. This is part of the Department of Public Enterprises’ ‘tough love’ approach, which is demanding that state-owned Denel needs to be able to survive independently and be sustainable.

Another source of independent cash-generation is through the Denel Medical Benefit Trust (DMBT), which a court in February ruled Denel can access. Between R800 million and R1 billion will be forthcoming from the Trust by the end of May and Denel is “working around the clock” to secure this money. Hlakoane said he is hopeful that this will go towards paying salaries and suppliers, but Denel also has obligations to the South African Revenue Service (SARS), amongst others. The company is hoping to pay its creditors in tranches so that they can all receive something: Denel owes about R1.7 billion to staff and suppliers.

Trade union UASA also has its eye on the DMBT and has gone the legal route to accessing the funds, which it hopes will cover Denel’s outstanding wage bill.

Restoring reputational damage

Hlakoane acknowledged that Denel has suffered a lot of reputational damage, especially as it has been in the media for not being able to deliver on projects or pay staff, and has been fighting legal battles in this regard. However, he maintains that there remains a lot of interest in Denel products, including the G5/G6 howitzers and Rooivalk attack helicopter.

Recently answering questions in the National Assembly, President Cyril Ramaphosa said government is commitment to ensure the survival of Denel and that there is still a lot of interest from other countries around the continent in buying military equipment from South Africa, including the Rooivalk helicopter. He said South Africa cannot afford to lose Denel’s manufacturing ability, especially given the current situation in the world where some countries easily resort to conflict.

Hlakoane reiterated that Denel’s order pipeline ‘looks good’ but require a stable Denel in order to deliver on. Although currents orders are not enough to thrive, “the market is very positive on our products.”

One of the solutions to both reputational damage and turning the company around is to form joint ventures, as this doesn’t expose Denel or the prospective buyer to risk. According to Hlakoane, a lot of companies have come forward regarding the aviation and missile businesses “and we are pursuing those,” with opportunities in places like the Middle East and the Americas.

Part of the turnaround process is exploiting Denel’s intellectual property (IP), in conjunction with Armscor, with which Denel is working closely. “Joint ventures are ideal for exposing IP to specific markets.” However, Hlakoane said Denel will be mindful of companies just seeking to acquire its IP and is wary of entities trying to steal it.

Overall, Hlakoane is bullish about Denel’s prospects and said its trajectory looks positive from where he is sitting. “We are still alive…I am quite confident we will survive,” he said. Although the company has “done wrong” in the past, he believes all is not lost and that Denel can indeed be successfully turned around.