UPDATE 2-South Africa's Denel asks for cash injection, rebuffs Saudi bid

South Africa's state defence company has asked the government for a 2.8 billion rand ($200 million) cash injection to help it emerge from a financial crisis and secure lucrative export deals, its chief executive said. Denel, a cornerstone of the country's once-mighty defence industry, is one of several state firms whose finances were damaged by years of mismanagement during former President Jacob Zuma's tenure.

Under current President Cyril Ramaphosa, public finances are stretched by the need to rescue other ailing state firms such as loss-making power company Eskom and South African Airways, which have both already received cash injections. CEO Danie du Toit, appointed late last year to turn Denel around, said recovery efforts were progressing well and the company could win 30 billion rand in contracts over the next two years if it received help to overcome acute liquidity constraints.

"We have an excellent return on investment potential on recapitalisation," he said in an interview at Denel's offices outside Pretoria. "Our products are still wanted, the brand is still respected, though of course there is still some nervousness about the financial state and sustainability."

He said he hoped the cash injection would be announced this month with the first funds arriving in September or October. Under its turnaround plan, Denel will exit some loss-making businesses and forge partnerships to bolster others.

Its first divestment could come in the next three to six months, and joint venture opportunities worth more than 2 billion rand over the next two to three years have been identified, du Toit said. However, he said Denel will not sell equity in any of its divisions to Saudi Arabia's state defence firm SAMI, which made a $1 billion bid last year for a broad partnership.

Denel produces military equipment from ammunition and armoured vehicles to missiles and attack helicopters. While it is a supplier to the South African armed forces, the bulk of its business comes from exports. Du Toit said Denel was on the verge of signing its largest export contract in its history, without disclosing the client.

SUCCESS WITHOUT THE SAUDIS Saudi Arabia and its allies account for almost half of South Africa's recent arms exports and a significant portion of future orders, so some industry insiders said a deal with SAMI made commercial sense.

The Saudi approach caused a stir, however, because it came as the Gulf kingdom was drawing criticism for the murder of journalist Jamal Khashoggi. SAMI signed a collaboration agreement with Paramount Group on Wednesday, another South African defence firm.

But Du Toit said that while Denel was open to partnering with SAMI on specific projects, it could not enter equity deals that would require relinquishing intellectual property rights. "The SAMI situation is simple: they come with offers of all sorts of investments, but they want to have control over things," he said. "We will succeed without the SAMI investment."

Denel said earlier this year it would wind down production of parts for Airbus' A400M military transport aircraft, Europe's largest defence project. Du Toit said Denel had agreed the terms of exiting the loss-making contract but it still needed government approval. The Denel division which makes parts for the A400M would not be economically viable without the Airbus orders, so the group could look to exit the business, du Toit said.

One venture that has paid off for Denel is a South Africa-based joint venture with Germany's Rheinmetall: Rheinmetall Denel Munition. "We have a good history with Rheinmetall, good results," Du Toit said, adding he was open to expanding cooperation with the company.

($1 = 14.0450 rand)

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