State-owned arms manufacturer Denel, until recently the poster boy for well-run state companies, cannot pay its suppliers after apparently exhausting its cash reserves on what Afrikaans Sunday paper Rapport called “an ill-advised acquisition”.
Mismanagement of the acquisition, approved by the Competition Commission, is the apparent reason the Denel board took the drastic move of placing chief executive Riaz Saloojee, chief financial officer Fikile Mhlontlo and group company secretary Elizabeth Africa on “special leave” following a board meeting on September 23.
Denel officials told the paper staff at the arms company were caught off guard by the board’s decision to force Saloojee, Mhlontlo and Africa to go home for two months.
Even Public Enterprises Minister Lynne Brown had no idea Denel was going to force its three top executives to go on leave pending a forensic investigation it reported.
The decision came barely six weeks after the appointment of Daniel Mantsha as Denel chairman in one of Brown’s “board rotations” at state companies.
The three executives were not even in the country when the board gave them a handful of days to give reasons they should not be suspended.
They were returning from London, where they had marketed Denel at the Defence and Security Equipment International exhibition – pushing the message that the company’s international prospects haven’t looked this good for some time.
When they got home, they applied for an extension to enable them to provide reasons they should not be suspended, but the request was denied.
The board’s move against the executives is allegedly related to the R855?million acquisition of armoured vehicle manufacturer BAE Land Systems SA in April, after which the company was rebranded Denel Vehicle Systems.
While Denel has been touted as one of the few state-owned companies still achieving solid financial results, it turns out this acquisition pushed it into a liquidity crisis according to Rapport.
This is because the company’s suppliers have been panicking for some time after a cash crunch forced the company to suspend payments for goods delivered, say suppliers.
In June, with the release of its annual results, Denel bragged about growing its revenue by 28% to R5.9?billion.
Its reported cash balance then was R1.9?billion and in its annual report, it confidently claimed to have “sufficient cash facilities” to keep trading.
That cash balance did not yet show the effect of the BAE deal, and now Denel owes its creditors millions for components it had to acquire to keep up with international orders.
Some smaller suppliers, which mostly sell only to Denel, said they had reached the point where they could only survive for a few more weeks before starting retrenchments.
“We simply can’t indefinitely go on delivering components,” said one.
“Denel can’t give us any answer about when this cash flow problem will be resolved. They said it would, at best, be in December, but even that is uncertain.”
This supplier has reams of correspondence between himself and Denel, in which the arms manufacturer makes promise after promise to pay.
Some suppliers are especially furious after Denel, in similar letters, told them it would probably stop buying from them because of their inability to help carry Denel’s financial burdens.
In other letters, Denel admits if it paid the suppliers, it would not be able to pay its own employees.
Pam Malinda, a Denel spokesperson, said the company had a healthy order book, with deliveries scheduled for seven years from now.
“We appreciate the support of our suppliers, who realise how important the economic benefits of a successful Denel are,” she said in response to questions.
The BAE deal gave Denel control of a manufacturing plant in Benoni on the Gauteng East Rand, and Denel was displaying the latest BAE vehicles in London last month.
One of the beneficiaries of the R855?million deal is the 25% shareholder of BAE Systems Land Systems South Africa, DGD Technologies, which has Moeletsi Mbeki as a director.
Previous Denel chief executive Shaun Liebenberg questioned the wisdom of the acquisition, saying there was a global oversupply of the mine-resistant vehicles made by BAE.
Sources in the defence industry also question if board chair Mantsha was appointed to Denel with a particular political agenda in mind.