November 29, 2018 / 10:42 AM / 17 days ago

South African arms company needs partners soon to survive, official says

* State-run arms maker Denel has cashflow problem

* South African government has fiscal constraints

* Official says selling equity could save Denel

* Saudi Arabia one of several potential partners

By Joe Bavier and Alexander Winning

PRETORIA, Nov 29 (Reuters) - South Africa’s defence industry is facing a crisis as the state-owned arms maker Denel struggles to survive, and rapidly agreeing equity partnerships is the only way to save it, one of the country’s top defence officials told Reuters.

Denel’s woes put at risk an industry estimated to directly employ around 15,000 people and which is one of the most advanced sectors of Africa’s most developed economy, said Kevin Wakeford, CEO of Armscor.

Armscor is responsible for procuring military hardware for South Africa’s armed forces. It also serves as custodian for South African defence-related intellectual property.

“The defence industry is the beachhead for high-level engineering and technological jobs in the South African economy,” Wakeford said. “We are at an inflection point. If Denel collapses those capabilities could be lost forever.”

Denel has been plagued by years of mismanagement and exposure to a far-reaching influence-peddling scandal that led banks to cut off lending. It recorded a 1.7 billion-rand ($125 million) loss - its first in eight years - in the financial year that ended in March.

Its cashflow crisis has led to delays in paying suppliers and left some assembly lines idle. Many smaller companies producing sub-systems and components for Denel products have folded.

“For us, the operational readiness of the South African National Defence Force is a top priority,” Wakeford said. “The situation has never been more severe than it is now.”

Saudi Arabia, the world’s third-largest defence spender, has approached South Africa, seeking to partner with Denel as part of efforts to establish its own defence industry. One source familiar with the offer said the bid - which would include acquisition of Denel’s stake in a joint venture with Germany’s Rheinmetall - was worth around $1 billion.

However, a potential deal has been complicated by the murder of journalist Jamal Khashoggi inside the Saudi consulate in Istanbul last month. Concerns have also been raised, including by Denel’s chairwoman, over ceding strategic security assets.

South African President Cyril Ramaphosa said earlier this month that Saudi Arabia was one of several suitors interested in Denel and that no decision on a partner had been taken.

Wakeford said equity partnerships were the only way to get Denel working again and that it was possible to safeguard the country’s national interests by including veto rights in any agreements.

“For Denel’s turnaround, there shouldn’t be any holy cows ... Denel can’t trade itself out of its current predicament,” Wakeford said. “You don’t have to allow your technology to be pillaged by modern-day Vikings.” ($1 = 13.6564 rand) (Reporting by Alexander Winning and Joe Bavier, editing by Larry King)

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