"In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex."--President Dwight D. Eisenhower
Once upon a time, President Eisenhower warned us to beware the possibility of the military-industrial complex acquiring too strong a hold over America. But what about us acquiring a piece of the military-industrial complex for ourselves?
A little less than five years ago, I made the argument that a great way to invest in the military-industrial complex was to buy shares of Lockheed Martin (NYSE: LMT), America's biggest defense contractor (The stock's nearly tripled since then). Today, we may be getting a chance at a similar investment opportunity.
This time, it comes from Israel.
Introducing Israel Military Industries
For some months now, the State of Israel has been kicking around the idea of selling its ownership stake in Israel Military Industries. Not to be confused with drone maker Israel Aerospace Industries (IAI), IMI is the government-owned weapons company famous first of all for developing the Uzi submachine gun -- although it's since sold the Uzi unit and branched out into building other (and bigger) weapons systems.
Last week, Israel began taking good-faith deposits from bidders interested in acquiring its most famous gunsmith. About a dozen companies are expected to submit bids for a sale anticipated to close in early 2016.
Who wants to own a piece of history?
At this time, the only company known to be bidding, that also trades on U.S. exchanges (such that you can actually invest in it), is Israel's Elbit Systems (NASDAQ:ESLT). And Elbit actually looks like the kind of private military contractor that could comfortably absorb an outfit like Israel Military Industries. Valued at $3.4 billion according to S&P Capital IQ, and boasting annual revenues just under $3 billion, Elbit is several times IMI's size. Generating $167 million in annual net income, it could also teach IMI a thing or three about doing business in the private sector.
An even better match, however, might be found right here in the U.S. of A. You see, IMI today specializes in the production of armored vehicles and rockets, and divides its business into three main groups: firepower, maneuverability, and small-caliber ammunition. As such, the company more closely resembles American defense giant General Dynamics (NYSE:GD) -- itself a maker of everything from Abrams main battle tanks to tank rounds and small-caliber ammo.
How much is IMI worth?
According to DefenseNews.com, IMI has an "assessed value" of $600 million. Experts estimate the company might go for as much as $800 million at auction -- but that estimate could be conservative.
According to Hoovers.com, IMI has annual sales of roughly $650 million today. Upon privatization, most of this business will go to the bidder, with Israel cropping out only IMI's "heavy rocket propulsion systems and other classified programs," to be retained and run by the Ministry of Defense (as a new company to be called Tomer).
Assuming IMI retains the bulk of its annual sales -- say, $600 million -- and applying to that number the 1.56 times sales valuation of General Dynamics, the $800 million sales price DefenseNews posits is reasonable. Indeed, a price of $900 million or more might not be out of the question.
A match made in Ohio?
But coming up with so much cash could be an issue for Elbit Systems. At last report, Elbit had less than $240 million in the bank -- and a debt load nearly twice its cash reserves. In contrast, General Dynamics has $4.4 billion in cash, and only $3.4 billion in debt.
Another factor working in General Dynamics' favor: IMI is system integrator for Israel's Merkava main battle tank and designer of Israel's Namer armored personnel carrier. Earlier this year, General Dynamics renewed its contract to build Israeli Namers at GD's own tank factory in Lima, Ohio. Consolidating IMI would help GD to keep revenues flowing from the Namer contract -- and give the Lima plant a new lease on life.
Although it isn't yet known whether General Dynamics will bid for IMI, it should. Fingers crossed.