Minutes

Mr R Goode, accompanied by Mr A Nkhulu and Mr I Phillips, addressed the Committee. He made the following points :

Denel remains "work in progress," but consensus has been established between government and labour. Denel's key products are :

• G5 and G6 artillery

• Aircraft maintenance and support

• Assembly/manufacture of Hawks, Gripen aircraft and Agusta helicopters

• Rooivalk

Kentron produces missiles, and unmanned aerial reconnaissance vehicles.

Denel is regulated by the National Conventional Arms Control Committee regarding export sales, which comprise 46% of turnover of R3.5 billion. Denel employs 10 000 people, down from 13 000 in 1992. In 1998 former Minister of Defence Joe Modise announced intentions to rationalise the aerospace industry in South Africa, of which Denel contributes about 65%. Black empowerment within the defence sector is now about 2 percent. Denel intends a 60/40 divide in staff empowerment by the end of 2002. Kentron has developed the Denel Academy to emphasise intensive maths training amongst learners, and has a 98 percent pass rate. Denel has disposed of Prohatch, an incubator scheme for ostrich eggs.

Restructuring is necessary because :

• The decline in the South African domestic market after the political settlement.

• The decline in the international arms industry after the end of the Cold War.

• Future growth through exports requires strategic partners to enable Denel to penetrate markets closed for national security reasons such as NATO.

• High Research and Development expenses.

• After losses until 2000, Denel turned a profit in 2001.

• The Government's vision of profit, preferred supplier to the SANDF, skills development and black empowerment.

Proposed equity partners :

• Turbomeca is a French company that manufactures and repairs helicopter engines, and will pay R30 million for a 51 percent shareholding in Turbomeca Africa. Denel will hold 49 percent. Signature of the documents is scheduled for Friday, May 3, 2002. Turbomeca employs 3000 people worldwide, 400 in Africa. It is a high technology industry, and does not hold mass employment opportunities.

• PW Defence, a British company, has withdrawn from proposals to take a minority stake in Swartklip because of conditionalities imposed in the United States markets.

• BAe Systems is the world's third largest defence company, and negotiations are far advanced that it will take a strategic minority equity interest in Denel. The government will retain a "golden share" and majority interest to ensure that SANDF requirements are non-negotiable. BAe Systems was selected because of similarities of diversity with Denel. There are direct areas of competition, e.g. Royal Ordnance, but Denel's interests will be protected and enhanced by marketing arrangement. Legal aspects are to be concluded by mid 2002.

Questions :

Mr R Heine (DP): - What damage to Denel from the recent thefts of computers and information relating to the Rooivalk?

• What Rooivalk contracts have been concluded?

• How can you guarantee that BAe Systems will not compete with Denel?

Mr W Odendaal (NNP): How will the R30 million from Turbomeca be spent?

Answers :

Mr I Philips :

• An investigation into the thefts is taking place under the national key points act under the auspices of the Department of Defence. Information was backed up. No public information will be given until the investigation is complete. Parliament will receive a full report.

• The only contract so far for Rooivalks is twelve aircraft for the SA Air Force, of which number has recently been delivered according to timetables. Export marketing continuing, but cannot divulge confidential information.

• There will be joint development of products. BAe Systems must contribute to Denel's survival, but will not be competing directly.

• The Denel board is currently considering R&D and re-machining. The funds will not be transferred to the Fiscus which is not expecting any contributions from Denel resulting from privatisation.

Appendix

Denel the Company

• High technology defence company
  - Aerospace
  - Ordnance
  - Commercial

• Keyproducts
  - G series artillery systems (prime contractor)
  - Aircraft manufacture and Support
  - Rooivalk (prime contractor)
  - Missile house

• Turnover R3.5bn, 46% comprising exports

• Employs 10000 people

• Regulated through NCACC

Restructuring of Denel

• Denel the company

• Restructuring background

• Transaction process

• Restructuring agreements

• Next steps

Restructuring Background

• Decline in domestic market

• International defence sector consolidation

• Sustainability and growth through exports = need for strategic partnerships

• Denel suffer losses 1997-2000

• Reviewed options and selected SEPs to
  - Support globalisation drive
  - Provide access to skills & technology

• Turbomeca "TM" majority SEP for Airmotive

• PW Defence minority SEP for Swartklip

• BAE SYSTEMS "BAES" minority SEP for Denel

• PW Defence indicate not wish to proceed

Transaction Process

• Government steering committee oversight

• Transaction led by DPE assisted by management, legal and financial advisors

• Statement of Intent on principles and process March 2001

• TM and BAES due diligence April-May 2001

• Government's vision for the development and transformation of Denel
  - Vision for Denel as profitable
  - Preferred supplier to SANDF
  - Continue skills development and transformation
  - Further empowerment equity partners to be introduced where appropriate

Transaction Process (Concluded)

• Offers made June 2001

• Consultations with stakeholders, especially labour

• Government assess offers

• Negotiating mandates obtained

• Negotiations November 2001 followed by detailed engagements to present

Restructuring Agreements

Turbomeca Transaction

• Heads of Agreement signed 25 February 2002 detailing commercial principles
  - TM to acquire 51% of a new company to be formed from Airmotive division to be called Turbomeca Africa
  - TM to pay R3Om cash and provide strategic contributions for controlling share

• Turbomeca Africa to be manufacturing, repair and overhaul facility for helicopter engines

• Major technology transfer and skills development · Secure existing jobs and lay basis for growth

Bae Systems Transaction

• Commercial terms still under negotiation

• Transaction principles:
  - BAES to acquire strategic minority equity stake so it can add value
  - "Golden share" to protect national interests
  - Value addition in key areas
  - Not compete with Denel where products overlap
  - Corporate governance through Denel Board

MOU with Labour on Restructuring and Transformation of Denel

• Common vision for company supporting security forces, providing employment and developing skills in high-tech sector

• Principles governing SEP transactions
  - Government to maintain ownership
  - SEPs to secure jobs, grow business internationally and so expand employment
  - Should jobs be lost due to reorganisation affected works are covered by Denel social plan

Next Steps

• Finalise legal aspects of Turbomeca transaction

• Target date for TM signature 3 May 2002

• Conclude commercial negotiations with BAES

• Complete legal aspects of BAES transaction for completion mid 2002