Much work and money required to keep Denel a going concern

Loss-making state arsenal Denel says its ability to continue as a going concern in the long-term is dependent on it receiving R1.7 billion from the state by March next year as well as the successful implementation of the recommendations of a Cabinet-appointed task team.
The R1.7 billion forms part of a Cabinet-approved R5.2 billion recapitalisation of the company. Former Group CEO Shaun Liebenberg, in his last annual report said R3.5 billion had been received from the Treasury from 2005 to date and had been used “to repay debts and to fund working capital”.
The R1.7 billion would be used to “purchase new plant and equipment restructure the businesses and processes, technology upgrades and skills development, and fund working capital. The balance of the recapitalisation is critical to the completion of the turnaround strategy of the company,” Liebenberg said in a report included in Denel`s annual report for the year to 31 March 2008.
Liebenberg left Denel for German defence company Rheinmetall in May. He has since been replaced as GCEO by his former chief financial officer Talib Sadik.  
In his report Liebenberg added that the group was now entering the second phase of its six year-turn-around strategy that started in mid-2005 when the company was technically insolvent.
“It is important to note that the initial 36 months of the restructuring process is coming to an end. During this period, some 80.0% of the focus has been on the strategy with 20.0% on improving efficiency, productivity and margin.
“In the next 36 months, 80.0% of the focus and effort should be on efficiency, productivity and margin improvement,” he said.
A director`s report in the same annual report warned that should “the interventions referred to above not materialise and sufficiently address the profitability and liquidity issues, the Group may be unable to realise its assets and discharge its liabilities in the normal course of business.”
Cabinet help
Liebenberg and Sadik`s turnaround strategy is premised on five pillars:
·         Secure “privileged access” to South African defence spend;
·         Engage state agencies;
·         Evaluate commercial viability (fix or exit) of business entities;
·         Create equity-based relationships/ formal alliance partnerships; and
·         Raise productivity and capabilities to world-class standards.
The director`s report notes that “key achievements to date” included “notable progress” in developing relationships and access to decision makers in various state departments.
Areas of engagement included “securing a minimum of 70% of defence spending for the local industry”;
recognition of local capability and conferring to the local industry preferred supplier status (subject to meeting price and performance standards); long-term and/ or, multi-year contracts to be awarded to the local defence industry; strategic alignment to the framework for technology development and manufacturing capacity development; and agreeing on standardised procurement policies and practices.
In his report Liebenberg explained that “privileged access” was a key pillar of the turnaround strategy. He added it was “a very common international practice”.
“This support is lacking in the South African context, more so with the decline, in real terms, of the defence budget over the past years,” Liebenberg said.

He added further that there had to be greater industry insight into planned defence spending and that local industry had to participate in departmental planning. Longer-term contracts to assist the industry`s cash flows, supply chain and resources was also vital.
“With such a small defence spend, SA can ill-afford to have disparity between the planning of its defence-related industry`s capacity and DoD expenditure,” Liebenberg said. “There is the imperative need for closer co-operation.”

The directors report continues that in addition to these “key achievements” a team appointed by the Cabinet comprising of the DoD [department of Defence], the DPE [Department of Public Enterprise] and National Treasury had been formed to identify defence spending that should be directed to contractors in areas where SADRI [the SA defence-related industry] has a capacity and competitive advantage.
“On 11 June 2008, Cabinet considered the recommendations and gave its support. Due to Denel`s strategic importance and the impact of the decisions at hand, the recommendations for a final decision were referred to Cabinet`s Committee for the Economic Sector.
“On 25 June 2008, Cabinet in the main approved the recommendations. As part of the strategy, bottom-up analyses were conducted at the business entities in order to define and propose further steps in the turnaround,” the director`s report added.
“Based on the structured assessments which included a review of strategic military importance and commercial viability, recommendations were developed for Rooivalk, Land Systems, Dynamics and Aviation MRO [maintenance, repair & overhaul]. These recommendations on the restructuring and future funding needs were presented to Cabinet.
“There was broad support for the recommendations by the Cabinet on the restructuring proposals and the necessary funding requirements for their implementation.
“A joint planning forum comprising industry, the DoD, the SANDF and Armscor will be established to ensure long-term visibility, enhanced coordination and production planning”. Some of the areas the report says that will be considered by the joint planning forum include proposals for:
·         Rooivalk: “To reach agreement on the deployment baseline and delivery timelines”;
·         Land Systems: “To assess, amongst others, opportunities for national consolidation of the business, enter into an equity partnership with a major international supplier to ensure long-term utilisation and access to global markets and for DoD to place a production order on Hoefyster of a sufficient size (at least two battalions)”;
·         Dynamics: “To actively explore equity partnership opportunities, to secure longer-term contracts and right-size the organisation to reduce the fixed-cost base and ensure sufficient DoD funding on certain programmes”; and
·         Aviation: To consolidate its operations with the SAAF`s MRO capability “to ensure maximum operability of SAAF aircraft is achieved and that there is elimination of the duplication of function and cost that currently exists”.
Denel structure
The Denel Group currently comprises three divisions:
·         Aerospace
·         Land Systems
·         Support Services & Other
“Aerospace” includes
·         Denel Dynamics (previously Kentron)
o        Denel Integrated Systems Solutions
o        Unmanned Aerial Vehicles
o        Missiles
·         Denel Aviation
o        Rooivalk
o        MRO
·         Denel Saab Aerostructures (80% Denel, 20% Saab)
·         Overberg Toetsbaan (OTB)
“Land Systems” comprises
·         Denel Land Systems: Lyttleton (previously Lyttleton Engineering Works)
·         Rheinmetall Denel Munitions (51% Rheinmetall, 49% Denel)
o        Denel Land systems: Western Cape (formerly Somchem and Swartklip)
o        Naschem
·         Pretoria Metal Pressings
·         Mechem
o        Mechem
o        Mechem Countermining
“Support services &other” involves
·         Denel Property Group
·         Corporate Services
·         Carl Zeiss Optronics (30% Denel, 70% Carl Zeiss; previously Denel Optronics)
·         Turbomeca Africa (51% Safran Group, 49% Denel; previously Denel Aviation Airmotive)
·         Cosource