The state-owned arms manufacturer Denel plans to sell non-core and unprofitable assets and make big changes to its business model. But it also wants to approach the SA taxpayer with a begging bowl.
Denel has unveiled a turnaround strategy that it believes could help the cash-strapped, state-owned arms manufacturer return to profitability and become a sustainable business within five years.
But there’s a caveat: the turnaround strategy can only work if the government agrees to throw a taxpayer-funded bailout to Denel.
Since the early 1990s, Denel has been at the centre of innovation in SA as it manufactures air-to-air missiles, stand-off weapons, surface target missiles, air defence and unmanned aerial vehicle systems. Markets in Asia, Europe, North America and the Middle East once relied on Denel for the supply of artillery and armoured vehicles.
But today, Denel’s financial crisis is so serious that it hasn’t paid full salaries to its more than 2,500 workers since April 2020. The company struggles to service its total debt of R3.6-billion and has failed to fulfil orders from customers.
A count by Business Maverick shows that from 2017 to 2020, Denel has recorded R7.1-billion in financial losses, received R2.8-billion in government bailouts, and had six permanent CEOs and three acting CEOs. Denel’s governance has been further weakened by the appointment of compromised individuals on its board — appointments were allegedly influenced by members of the Gupta family under the stewardship of former Public Enterprises Minister Lynne Brown. This script has also played out at state-owned enterprises (SOEs) including Eskom, SAA and many others.
The turnaround plan
William Hlakoane, the acting CEO, believes that with time, money and efforts by management to change Denel’s business structure, the company can turn its fortunes around.
The five-year turnaround strategy will also involve the sale of yet-to-be-determined noncore, or unprofitable assets, which Denel conservatively estimates will realise about R1.5-billion over the next five years.
But this will be difficult because some of Denel’s assets have deteriorated due to neglect and realising value from them will be a herculean task. For example, during its investigation into Denel, the Special Investigating Unit found that the intellectual property for some of Denel’s highly sought-after missiles was stolen in 2018 by unnamed current and former workers and allegedly given to Saudi Arabian Military Industries (SAMI). Without the intellectual property, it is no longer a secret how Denel manufactures artillery and armoured vehicles, paving the way for competitors such as SAMI to take lucrative contracts away from it.
Hlakoane — a qualified engineer with more than two decades of experience in rail, transport, logistics, energy, mining and defence industries — has acknowledged the enormous task of having to find suitors for Denel’s assets.
“We do acknowledge that it will take some time to sell these assets while the payment of legacy debt and the requirements for liquidity are immediate,” he said.
To fix Denel’s liquidity crisis and spruce up its assets ahead of their potential sale, Hlakoane said Denel requires “significant cash injections” from the government. He didn’t disclose how much in cash injections Denel requires.
“We are encouraged by the unwavering support that we have been receiving from our shareholder, the Department of Public Enterprises. This is underlined by its acknowledgement that there is a need to assist Denel with regards to its financial situation,” he said in a statement.
“Thus, I am positive that the discussions with other government departments that have [a] keen interest in Denel’s survival, such as the Department of Defence and the National Treasury, will soon bear positive results.”
But the Treasury has resisted requests for more bailouts to help financially distressed SOEs as it wants to cut government expenditure and ballooning debt.
Other components of the Denel turnaround strategy include changing its business model by reducing its current operating divisions from six (Denel Aeronautics, Denel Dynamics, Denel Land Systems, Denel Vehicle Systems, Denel Overberg Test Range and Pretoria Metal Pressings) to two. One division will focus on engineering and the other on manufacturing and maintenance. Reducing or merging the divisions is aimed at eliminating redundancies and costs in areas such as supply chain management, human capital, IT and finance, said Hlakoane.
Denel’s engineering division will merge all the company’s capabilities in artillery, infantry and vehicle systems, its missile and precision-guided munitions business, as well as its management of complex integrated systems.
“It will drive the company’s diversification of technology into existing and new markets in fields such as command and control, cybersecurity and communications while researching and developing new technologies of the future.”
The maintenance and manufacturing division will focus on aeronautics, unmanned aerial vehicle systems and the production of small- and medium-calibre ammunition, as well as the production of combat vehicles.
Not only does Denel require financial support for the turnaround strategy to work, but it also needs people. In recent months, Denel has faced an exodus of highly skilled workers who grew fed up with not being paid full salaries. DM/BM