South Africa: Denel stakes turnaround on Treasury injection

By Xolisa Phillip, in Johannesburg

Posted on Friday, 25 November 2022 15:34
A corporate logo is seen outside the Rheinmetall Denel munitons plant near Cape Town, South Africa, November 6, 2018. REUTERS/Mike Hutchings

The decline of Denel would compromise South Africa’s strategic independence, says chief restructuring officer (CRO) Riaz Saloojee, making the timely disbursal of the R3.4bn ($196m) lifeline thrown to the entity critical.

“The funding is critical,” Saloojee told lawmakers on 16 November 2022 during a briefing about Denel’s turnaround plan. “Denel, [as] the custodian of strategic and sovereign capabilities, gives us … strategic independence and security of supply.”

“Many countries … do not have strategic independence or security of supply when it comes to defence industrial capabilities,” says Saloojee.

Denel supplies the South African Air Force (SAAF) and South African National Defence Force (SANDF) aerial and landward needs, respectively.

The defence manufacturer’s Rooivalk and Oryx aircraft are important for the SAAF’s combat capabilities, while its landward products enable the SANDF’s peacekeeping missions throughout the continent.

“If we, as the original equipment manufacturer, had to allow that capability to decline, we would not have been able to support the SANDF and the SAAF with all the recent contingencies they had to address, for example, our deployments in the DRC and our deployment in Mozambique,” Saloojee says.

In the medium-term budget policy statement (MTBPS), the National Treasury allocated Denel R3.4bn “to stabilise the entity and to unlock a R12bn order book”.

We made errors in terms of on time, on budget manufacturing.

“Denel will be allocated R204.7m to reduce contingent liabilities arising from its weak financial position and R3.4bn, if set conditions are met, to complete its turnaround plan,” says the Treasury in the MTBPS.

As part of its funding application to the Treasury, the arms manufacturer committed to raise R1.8bn that will be realised through self-help measures, including the fast-tracked disposal of non-core assets and the sale of properties.

During the briefing about the company’s turnaround plan, Denel informed legislators it has raised R980m. The remaining R890m will come from the sale of properties at Denel’s Irene Campus in Gauteng and in Cape Town, and non-core businesses in the engineering space.

The assets identified for disposal, described as “excess infrastructure”, will not contribute to the company’s future core business, according to Denel’s executives.

Cost of capture

Saloojee is a former Denel CEO, and was one of three executives who, in 2015, was pushed out of the organisation by a new board to facilitate the entry of Gupta proxies.

  • The circumstances surrounding the boardroom putsch and subsequent decay that set in at Denel are detailed in Part 2 of the Judicial Commission of Inquiry into State Capture (Zondo Commission) reports. The Zondo Commission not only established state capture, but also named the Guptas as co-architects and chief beneficiaries.

In the aftermath of the 2015 leadership shake-up, Denel went from a self-sufficient arms supplier and employer of choice, with an order book worth R35bn, to an organisation in financial distress.

As the company bled financially and administratively, customers took flight and a brain drain ensued because of Denel’s inability to meet contract supply and salary obligations.

Furthermore, bank and performance guarantees dried up, plunging Denel into the red.

Saloojee told parliamentarians that “we’ve lost significant contracts over the last few years. A case in point is the Egypt [missiles] contract – we lost a R8bn contract because we couldn’t put up a performance guarantee or financial guarantee”.

“We made errors in terms of on time, on budget manufacturing. Our business efficiency processes were not [at] par with our contractual obligations. We paid huge penalties, which had a devastating effect on our liquidity.”

Saloojee says: “The fact that we were not paying salaries was a very traumatic experience.”

Turnaround plan

Saloojee returned to Denel four months ago as CRO. “When I got here, the intention with the board and management was, we’ve got to stop the bleeding,” says Saloojee.

“We had to stabilise the business. We said that within the next 18 to 24 months, we must get this business right,” Saloojee says. “If we fail, industry fails.”

The board and shareholder-approved turnaround plan is premised on three pillars: stabilise, sustain, and grow. It is also underpinned by a restructuring that will result in Denel focusing on core businesses and rightsizing the organisation.

Part of the problem is that we have not been able to executive because of our liquidity crisis

The R3.4bn National Treasury recapitalisation will assist Denel in implementing its turnaround plan. In addition, the funding will bolster the company’s efforts to re-establish performance and bank guarantees.

Saloojee says: “We’ve got the secured order book of R12bn. When we say secured, those are contracted orders – we have to execute those orders. Part of the problem is that we have not been able to executive because of our liquidity crisis.”

New frontiers

The growth aspect of the turnaround plan involves increasing Denel’s customer base beyond the SANDF abroad, in the region, and in the company’s domestic market.

According to Saloojee, Denel has been engaging with markets in the Middle East and East Asia – Vietnam, Thailand, Philippines, Indonesia, Malaysia. “Africa is a key footprint.”

Although previously not a focus, Denel is looking into a special intervention to address the African market, says Saloojee.

At home, Denel sees the vandalism crisis confronting economic infrastructure – fuel pipeline, transmission system, and transport network – as an opportunity.

Saloojee revealed that Denel has been in conversations with Transnet, Eskom, and the Passenger Rail Agency of South Africa about security systems in the integrated systems space to help the state-owned entities secure vulnerable facilities.

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