State-owned aerospace and defence 
industrial group Denel is looking at how it could reduce the amount of 
recapitalisation it needs to complete its 
restructuring and turnaround.

“We’re still in discussions with government about the balance of the recapitalisation necessary for Denel’s restructuring,” reports Denel Group CEO Talib Sadik. “We are taking into account the financial constraints the government faces.”

Originally, Denel calculated that it required, and so requested from the government, R5,2-billion (in 2006 rands) to fund its recapitalisation, restructuring, operating losses and legacy obligations, but has so far been granted only R3,5-billion. The group has continued to hope that it would receive the final recapitalisation tranche of R1,7-billion from the State.

However, it has been given financial guarantees instead, allowing it to raise money on the markets, but this has not strengthened its solvency. Using these guarantees, Denel borrowed some R1,1-billion during the year ended on March 31, and is expected to borrow a further 
R550-million during the current year.

However, the amount required by Denel to complete its recapitalisation may no 
longer be R1,7-billion. “We are looking at how we could reduce the amount of recapitalisation we need,” Sadik reveals. “We are looking at a few projects and opportunities. If we succeed, we will reduce the amount we require. We have timelines for these projects. The projects 
include cost reduction projects, revenue growing projects and partnership opportunities.”

These projects are being implemented across the entire group, including some of the associate companies which have been affected by the global downturn and local economic conditions. Associate companies are those Denel subsidiaries which have since become associates, with strategic equity partners (SEPs) acquiring majority stakes. These are Carl Zeiss Optronics South Africa, Rheinmetall Denel Munitions and Turbomeca Africa.

“Overall, the companies with SEPs are doing well, driven by improved levels of industrialisation and increased order cover resulting from better international market access,” Sadik 
explained, although Denel Saab Aerostruc-tures has been affected by the delays in the Airbus A400M military transport aircraft project, in which it is a risk-sharing partner, as well as by a slippage in its business plan, which turned out to be overambitious, 
underestimating the business impact of the recently completed R400-million industrial recapitalisation programme.

The entities that are still entirely owned by Denel are Denel Land Systems, Pretoria Metal Pressings (, Mechem, OTB (the Overberg Test Range), Denel Aviation, Denel Integrated Systems Solutions and Denel Dynamics. Denel Dynamics is responsible for missiles and 
unmanned air vehicles (UAVs), and is planned to be split into two separate businesses.

The group is negotiating with a possible SEP for the missiles business, and hopes to find such a partner or partners for the UAV business and Denel Land Systems. Other subsidiaries will remain wholly owned by the group, either because of their strategic importance to national defence, or because they are profit-
able and do not need a strategic partner in order to successfully compete in the international markets.

With an eye to the future, Denel was involved 
in research and development (R&D) projects worth R1,2-billion, during the last financial year. This is equivalent to more than 25% of the 
Denel group’s total revenues, including the associates. “This is in comparison with global defence and aerospace companies, who generally spend approximately 10% of 
revenues on R&D,” highlights Sadik. “This provides further support for the conclusion of SEPs in more Denel entities, to drive the
industrialisation and commercialisation pro-
cess, to bring in much-needed profitable orders
and secure the sustainability of these highly 
sought-after capabilities in South Africa.”

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