Treasury grants Denel R3.4 billion for restructuring on the road to profitability

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A single sentence in Finance Minister Enoch Godongwana’s medium term budget policy statement (MTBPS) would surely have put a smile – at minimum – on the faces of Denel employees at all levels and Public Enterprises Minister Pravin Gordhan.

Addressing risks to State-owned enterprises (SOEs) in Parliament’s temporary home in the Cape Town City Hall yesterday (Wednesday, 26 October), Godongwana said “Denel is allocated R3.4 billion to support recent progress made to stabilise the entity”.

This amount was mentioned by Gordhan at last month’s Africa Aerospace and Defence (AAD) exhibition at Air Force Base (AFB) Waterkloof when he spoke about the future of the State-owned defence and technology conglomerate, which he once called “an example of State capture”.

The R3.4 billion will come to Irene, Centurion-headquartered Denel to implement a turnaround plan estimated to need R5.2 billion in total. This is being funded by R990 million from the Denel Medical Benefit Trust (DMBT) with R1.8 billion to come from the sale of non-core assets and along with government’s injection put the restructured defence and technology conglomerate on the road back to profitability, albeit with a leaner workforce.

In September organised labour was informed of possible retrenchments totalling around 30% of its reported 1 807 employees by then newly named interim chief executive Mike Kgobe. All told, 663 Denel employees could be retrenched in five categories. They are senior officials and managers, professionals, technicians and associate professionals, clerks and “crafts and related trades”.

The last word on Denel specifically in Godongwana’s statement was that the R3.4 billion will be augmented by the non-core asset sale “unlocking a committed order book of R12 billion awaiting execution”.

The Denel funding, along with funds for Transnet and SANRAL (SA National Roads Agency), will be made available using a Special Appropriation Bill allowing the three entities “to adjust their business models and restore their long-term financial viability”.

In response to Godongwana’s announcement, Denel said the injection will revitalise the business and move it to the next phase of a strategic drive to create a long-term, sustainable future based on improved business efficiencies and growth.

Interim Group CEO Mike Kgobe said “this will enable us to streamline the business and establish a base from which we can significantly grow our order book and access new revenue streams.”

Kgobe said the decision to recapitalise Denel was a vote of confidence in a credible process to stabilise the company as it emerges from a sharp downturn, caused by mismanagement, state capture and governance failures.

“Government, as sole shareholder, recognises the strategic importance of Denel as a commercially-driven aerospace and defence company and the immense value we can add to the economy in terms of innovation, creation of intellectual property and export revenue generation to contribute to the balance of payments,” Kgobe said.

The R3.4 billion allocated to Denel comes with conditions and will be monitored by Treasury, the Department of Public Enterprises (DPE) and Denel’s directors. Denel sees it as a lifeline to implement priority measures to sustain the business.

“Immediate actions by management with board oversight will be to exit non-core assets and realise cash inflows toward the R1.8 billion Denel will contribute to its turnaround plan additional to the R3.4 billion allocation. In line with the turnaround plan, Denel is proceeding with actions to align costs of running the business with the current revenue base while retaining core capabilities for growth.”

“The focus now shifts to a critical stage where we need to sustain the new emerging business model,” said Kgobe. In this phase, Denel will implement steps to restructure the company and reduce current operating divisions from six to four – these will cover land, sea, air and cyber/civil security.

Kgobe said it became quite clear that the previous business structure of Denel was not sustainable. It required a fundamental restructuring and a reduction of the cost base to affordable levels.

The company will now start to reduce its geographic footprint, rationalise facilities and implement a shared services model in areas such as supply chain management, human capital and development, information and communication technology as well as finance and public affairs.

“I am confident a sustainable business model will enable us to focus on growth. There is still significant global interest in our battle-proven products in artillery systems, infantry weapons, small to medium ammunition and infantry systems as well as aeronautical solutions of manned and unmanned aircraft and landward combat vehicles with armoured protection.

“Our reputation for excellence and quality has not been dented and there is still an appetite for partnerships with local and global companies in the aerospace, defence and technology sectors,” he said.

In the coming months, Denel aims to identify new revenue streams and explore further market opportunities for its  existing product range as well as the advanced technology sectors of systems integration, command and control and cybersecurity.