Elul Group News Analysis - June 2011
General News Summary
Much Ado Over 67
An aura of tension hangs over Israeli-U.S. relations in the wake of speeches by President Barack Obama and Prime Minister Benjamin Netanyahu during his late-May visit to Washington. Much of attention focuses on the President's reference to “the 1967 lines with mutually agreed swaps” as the territorial basis for Israeli-Palestinian peace negotiations, a statement which has been oversimplified and misinterpreted in the public uproar that followed the May 19 speech in which the statement was made. The mere mention of the 1967 lines, based on the 1949 armistice which were Israel's de facto borders till the capture of the West Bank and Gaza in the Six-Day War, raised red flags with Netanyahu; in a statement after the Obama speech and reportedly in a private meeting with the President the following day, the Israeli leader pledged that Israel would never return to the 1967 borders, which were indefensible and would endanger its very existence. Netanyahu repeated that position in later speeches to AIPAC, the American Jewish lobbying organization, and in a speech to the joint houses of Congress.
And indeed, those 1967 lines, if taken on their own, make Israel vulnerable; in the Sharon area couple of miles north of Tel Aviv, for example, it is only nine miles wide from the proposed east border to the Mediterranean, Israel's west border line. Israel couldn't, and shouldn't, accept that situation – as evidenced by the spike in Netanyahu's popularity at home after the visit.
Even those who defend the President's misunderstanding terminology, will find it hard to deny that Obama made a major tactical mistake in mentioning the 67 lines out loud. He should have known that this would be a trigger point for his Israeli visitor – and even if he didn't know, he should have been told so by his team of advisers, some of whom have been involved in Israeli-Palestinian negotiations for two decades. And that it would draw attention, as it did, away from important messages both he and Netanyahu delivered during the month of May.
These include several important statements by Netanyahu in a speech to Israel's parliament, the Knesset, shortly before his departure. For the first time the Israeli leader, who until two years ago had steadfastly refused even to countenance the idea of a Palestinian state, granted that in a peace deal with such a state some Israeli settlements would end up outside Israel's borders, and that Israel needed to maintain a military presence along the Jordan River (and, by implication, not in the much wider Jordan valley, which presumably would be part of the Palestinian state). He also pledged that “creativity and goodwill” can lead to a resolution of the contentious issue of the final status of Jerusalem.
Also lost in the uproar: Obama’s opposition to a U.N. General Assembly vote for Palestinian statehood, his recognition of the obstacle that Hamas currently poses to peace, and his continued unwavering support for Israel’s security were significant declarations in support of Israel.
In early June, French Foreign Minister Alain Juppe told Netanyahu that if the deadlock over talks continues, France will consider supporting the Palestinian request for full U.N. membership at the General Assembly. PA President Mahmoud Abbas said he accepted – and Netanyahu had yet to respond to the French suggestion for an Israeli-Palestinian summit to be held in Paris in September.
New Flotilla Alert
The Obama administration has said that a second “peace flotilla” from Turkey to Gaza due to set sail in the coming weeks, would be irresponsible and provocative. “We’ve raised our concerns with the Turkish government as well, and we’ve also met and said publicly as well as privately, meeting with some of these NGOs, about the risk of attempting to break this blockade,” a State Department spokesman said. Israel Defense Forces naval units are preparing to intercept the seaborne convoy, which appears to be going ahead even after Egypt has opened its Rafiah border crossing with the Gaza Strip.
Ofer Investigation
Attorney General Yehuda Weinstein is looking into allegations that the companies controlled by Sami Ofer, Israeli shipping magnate, sold an oil tanker to the Iranian national shipping company, as well as having their ships dock in Iranian ports and load and offload cargo there. Sami Ofer, who passed away at the age of 89 on June 3, owns a number of shipping companies abroad and Israel's Zim lines, as well as a controlling interest in Israel Chemicals through their Israel Corp. investment firm. The U.S. State Department announced in late May that it was bringing sanctions against the Ofer Group for sale of the tanker. Iran has denied any dealings with the Israelis.
The Economy
Growth Estimate
Israeli GDP will grow more than originally anticipated and unemployment is lower than the previous estimate, the Bank of Israel said in early June. The central bank predicted GDP would be 5.2%, lower than the 5.4% predicted earlier in the week by the OECD - Organization for Economic Cooperation and Development, but higher than its own previous forecast, of 4.5%. At the same time, it lowered its joblessness estimate to 5.8%, an all-time low.
The OECD predicted that Israel's 5.4% 2011 growth would fall back to 4.7% in 2012 partly because of rising interest rates. Growth for Israel, one of the newest members of the grouping of the world's leading economies, was 4.7% last year. The OECD predicted 2.3% growth for all its members countries this year, and 2.8% in 2012.
Gas Estimate Raised
Israel's two new offshore natural gas fields may contain almost double the amount of gas previously estimated, according to David Stover, the head of the American partner in the drilling enterprise. Stover, CEO of Noble Energy, told a conference in the U.S. that the two fields, Leviathan and Tamar, could together hold to 35-45 trillion cubic feet of natural gas, compared to the current estimate of 25 trillion cubic feet.
Fischer won't Take Raise
Bank of Israel Governor Stanley Fischer has said he won't accept a pay raise about to be approved for holders of the top spot at Israel's central bank. The monthly salary of the governor was due to be raised by NIS 38,000 (about $11,000) to NIS 64,000 ($17,500). Sources at the Bank of Israel told the Globes that Fischer, who is being considered for the vacancy as head of the IMF, supports the raise for future governors, because it will help attract a qualified successor if and when he steps down. Fischer's second five-year term as governor is due to end in 2015.
“Gas Won't Kill Technology”
Though Israel is sitting on a potential $150B or more in future revenues from natural gas, it will not abandon its prospering export industries, Finance Minister Yuval Steinitz pledged. “We are not Kuwait, we are not Abu Dhabi,” said Steinitz on his way to a meeting of the OECD. ““Human capital is still the most important capital for this country,” he said. “The gas is just a nice addition; it’s not the main thing...”
Unemployment Down - Record
The Central Bureau of Statistics reported in late April that Israel's unemployment rate for February fell to 6% from 6.1% in January - close to the all-time low of 5.9% reached in mid-2008. There were 192,000 unemployed in February, the CBS said. Unemployment figures for December 2010 were lowered from 6.4% to 6.2%.
Export Growth
Israel's annual exports have increased by a multiple of 13,400 between independence in 1948 and the present, according to a survey released by the Israel Export Institute (IEI). Exports in 1948 were about $6M, and estimated exports in 2011 will reach $80.5B, the IEI said. For the coming year, IEI anticipates a 7% increase in the exports of goods and services, to a total of $86B.
In another survey for the first quarter of 2011, the IEI said that Turkey had become Israel's third-largest export market. Despite political tensions between the two countries, Turkey jumped from ninth on the list of customers to third, with a 73% increase over the previous quarter. Much of the growth came from exports of chemicals and refined oil products, which amounted to $260M.
The U.S. remains Israel's largest export market, with exports totaling $3B, followed by, in order, the Netherlands, Turkey, Germany, China, Italy, the UK, India, France, and Canada.
Israeli-Indian Pact
The Confederation of Indian Industry and Israel's High-Tech Industries Association have signed an agreement aimed at promoting innovation and entrepreneurship. And the Indian state of Andhra Pradesh, which includes software center Hyderabad, is close to signing a cooperation agreement with Israel's governmental Matimop R&D organization. The two moves come as the countries seek to add high technology to their growing economic cooperation, according to a report published in the Jerusalem Post. Trade between the two countries reached a bilateral $4.7B last year, not including defense, whose exact volume is secret but is estimated at about $1B.
Centers of Excellence
The National Council for Higher Education has designated Tel Aviv University, the Hebrew University of Jerusalem and the Weizmann Institute to operate three “centers of excellence” with the goal of reversing brain drain, strengthening Israeli computer sciences and enhancing the infrastructure for research. The project, due to begin immediately, has a budget of NIS 175M (about $50M) over five years.
EMG Investors Threaten Suit
American investors in Israeli-Egyptian firm EMG have threatened to take legal action against the Egyptian government unless the flow of Egyptian gas to Israel is resumed. Supplies have been halted since late April after explosions cut the pipeline.
Though Egypt has said that it wants to raise the price of the gas, an Israeli official told Reuters that Israel “doesn't think” the flow of gas was stopped for political reasons in the chaos after the ouster of President Hosni Mubarak. The official said that EMG invested $550M in the off-shore pipeline that connects El Arish in Sinai to Ashkelon in southern Israel, and that Egypt is losing $4M a day since the gas was cut off.
Mergers & Acquisitions
Broadcom-SC Square
Broadcom, the semiconductor manufacturer based in Irvine, California, has acquired SC Square of Tel Aviv for $42M. SC Square specializes in Internet security. It was Broadcom's fourth Israeli acquisition in the last six months; the others are Provigent ($320M), Percello ($88M), and Sightic Vista ($10-$20M).
Limelight-Acceloweb
Limelight Networks has paid an estimated $20-$30M in cash and shares for AcceloWeb Ltd. of Tel Aviv. Limelight, based in Tempe, Arizona, with a worldwide presence, says integration of AcceloWeb's technology with its own web and application acceleration services will help customers dramatically improve “time to action” on their websites - the period a user has to wait to perform tasks on a website or within a web application.
Jive-OffiSync
Jive Software of the U.S. has acquired Israeli firm OffiSync Ltd. for $30M in shares. OffiSync, of Tel Aviv, develops toolbars for synchronizing documents on Microsoft Office, Google Docs, and Google Apps environments.
AFCV (Summit Partners)-Answers
Internet Q&A firm Answers.com, based in Jerusalem, has been squired by AFCV Holdings, a portfolio company of Summit Partners, for $127M in cash. AFCV plans to delist Answers from the NASDAQ, and make it a private firm. Bob Rosenschein, Answers' CEO and founder, said that the acquisition price for the firm, the second largest Q&A site in the U.S., was 33% higher than the average closing stock price over the 90 days prior to the sale.
Teva's Two Acquisitions
Teva Pharmaceuticals, Israel's world class pharma based in Jerusalem and Petah Tikva, in May added to its portfolio the acquisition of Cephalon of the United States and Taiyo of Japan. Cephalon, a maker of branded biopharmaceuticals specializing in the oncological field based in Frazer, Pennsylvania, was acquired for $6.8B, while the purchase price for Taiyo, Japan's third-largest generic drugmaker, was $460M. Both transactions were all-cash deals.
In late May Teva's president Shlomo Yani visited India. Press reports speculated that he was looking for possible partners rather than another acquisition so soon after the purchase of Cephalon and Yaiyo.
Diamond Mine Sold
Lev Leviev, the Israeli diamond megamerchant and real estate magnate, has turned an impressive profit in the sale of his 18% stake in an Angolan diamond mine. Leviev purchased the interest in the Catcoa mine for $20M in the 1990s, and recently sold it to China's Sonangol international for $400M, the Globes said, quoting a Russian newspaper report.
Frutarom-CHR. Hansen
Frutarom, an Israeli food flavorings and specialty ingredients firm, is purchasing the Italy-based savory activity and assets of Danish food ingredients maker CHR. Hansen for $35.2M. It is Frutarom's third acquisition this year; it previously bought the savory activities of Norway's Rieber & Son and the assets and activities of Britain's food ingredients and spices distributor EAFI (East Anglia Food Ingredients).
Finance & Investment
Greylock 2nd Israel Fund
Greylock Partners, one of the world's oldest venture capital funds, has raised $200M for its second Israel fund. The firm closed the funding in full only a few months after launching the fundraising. Based in California and with offices in the Boston area, India and London, Greylock began operating in Israel in 2001, and has invested in about 30 Israeli companies.
Q1 VC $342M Fundraising
Israeli venture capital-backed companies raised $342M in the first quarter of 2011, double what was raised in the first quarter of 2010, according to the quarterly PricewaterhouseCoopers Israel MoneyTree Report. It was also the most raised in a quarter since the collapse of Lehman Bros. in September 2008. That figure is double the amount raised in the corresponding quarter of 2010. PwC Israel partner Rubi Suliman predicted the trend would continue, with an increase in Israeli initial public offerings on Wall St. for the rest of the year.
Cleantech Fund
Israel Cleantech Ventures has raised $60M of a planned $100M for the firm's second fund, according to a report in the Globes. In the meantime the firm, based in Ramat Hasharon northeast of Tel Aviv, has invested part of the proceeds of the new fund in two companies – Panoramic Power of Kfar Saba, northeast of Tel Aviv, developer of a real-time energy monitoring platform, and Innosave, developer of an energy-saving drive for electric motors.
According to a survey by the Ernst & Young consultancy firm, investment in Cleantech totaled $108M, with the average investment increasing from $2.5M to $4M.
Israel Chemicals Acquires Fuentes
Israel Chemicals Ltd. (ICL) acquired Spanish fertilizer company Antonio Fuentes Mendez SA; size of the deal was not disclosed. The acquisition includes all four companies of the Fuentes group, its production line of liquid fertilizers, soluble fertilizers, and the production line of field fertilizer compounds. Fuentes has production plants in southern Spain, facilities at the Cartagena Port, offices, and other facilities. Israel Chemicals sells about $650M worth of specialty fertilizers annually; Fuentes had a turnover of €113M ($163M) in 2010.
Meanwhile Cleveland Phosphates, an ICL subsidiary, has received a £15M British government grant to develop a major find of polyhalite underneath phosphate deposits at Cleveland's mine in Teeside, northeast England. The deposit of polyhalite, a mineral that when crushed is used in organic fertilizers, is said to amount to 1 billion tons. ICL is considering construction of a special fertilizers plant in Tees Valley, need the Cleveland potash mine.
High-Tech Fundraising 39% Up
140 Israeli high-tech companies raised $479M from local and foreign investors, the highest quarterly total in two years, and 39% higher than the amount raised by 100 companies in the previous quarter, according to the IVC survey. Another survey, by the Calcalist economic supplement of the Yediot Aharonot, said in mid-April that $1.12M had been raised in mergers and acquisitions, public stock offerings and other investments over the period – and that, in its view, high-tech exits for all of 2011 could be expected to reach a value of $4.5B.
Science & High Technology
Deal with Top Clinic
Israel's Rainbow Medical, which invests mainly in medical device companies, has signed a strategic cooperation agreement with the Cleveland Clinic, a U.S. medical center. Cleveland Clinic, with operations in Ohio, Florida, Nevada, Canada and Abu Dhabi, will conduct preclinical and clinical trials of early stage Rainbow companies. Among the Rainbow firms involved in the agreement are Affix Medical, which has developed a catheter for atrial fibrillation of the heart, and Lotus Ltd., which has developed a capsule to induce satiety and decrease food consumption.
Work on Aps
Microsoft's Israeli R&D center is developing applications for planned Nokia cellphones using the Windows Phone 7 operating system, due to be launched late this year or early in 2012. Microsoft has 600 R&D employees in Israel.
Marvell Development
Marvell Technology Group, a leading fabless semiconductor maker, will invest $200M in its Israeli development center over the coming years. Marvell's Israeli development center has 1,200 employees, and it is the company's largest center outside the US. Marvell, with headquarters in Bermuda and operations in California, Europe, Israel, Singapore and China, employs about 5,700 people worldwide.
Anti-Acne Foam
Foamix, based in Rehovot south of Tel Aviv, and Israeli businessman Moshe (Mori) Arkin's Arkin Holdings, have signed an agreement for the joint development of a foam that treats acne. Foamix develops foam and gel-based versions of current and new dermatological and gynecological drugs. The company is developing foams to replace current gels and creams, in order to improve absorbency of the drugs through the skin and improve their efficacy. The company has several cooperation agreements, including with India's Dr. Reddy's Laboratories, Bayer of Germany and Ferndale Laboratories of the U.S.
Parts For Mercedes
Arkal Automotive, a developer and producer of plastic components for the automotive industry, will supply parts to four Mercedes Benz models. According to a report in the Calcalist, Arkal's six-year deal with Mercedes includes components of the German automaker's A, B and SL series. Calcalist says experts estimate the deal's value at €100M or more. Arkal Automotive, founded in 1997 as a subsidiary of Arkal Plastic Industries of Kibbutz Bet Zera in the Jordan Valley, reportedly had a turnover of €200M in 2010.
Surgeon's Helper
SpineAssist, developed and distributed by Mazor Robotics of Caesarea, has received European Union (CE) approval for use in brain surgery, the company reported in early May. The device, already in use in spinal surgery, is the invention of Prof. Moshe Shoham and colleagues at the Haifa Technion Institute of Technology. Mazor says it is seeking U.S. Food and Drug administration, and developing applications that may bring relief to the symptoms of Parkinson's disease. According to the company, it has been used in upwards of 10,000 operations worldwide.
Cross-Border Partnership
Palestinian millionaire Bashar al-Masri and Israeli Andres Kukawaka, a former information systems deputy GM at Israel's Ness Systems, are partners in TeQual, which offers outsourced software development, quality assurance and support services to IT organizations and software companies in North America and Western Europe. The firm, with corporate offices in Herzliya, Israel and a development center in the West Bank Palestinian city of Ramallah, is seeking to compete with similar outsourcing operations in India. Most of the 80 software engineers on its payroll are located in the Palestinian city.
Something Old, Something New
Three international companies opened new R&D centers in Israel in early summer. In late May, Motorola Solutions opened its brand-new Israeli headquarters and R&D center at Airport City, near Ben-Gurion International Airport. More than NIS100M was invested in the five-story, 30,000- square-meter building. 1,300 Motorola employees, including 800 engineers, will work at the new center. Motorola began its activities in Israel in 1948.
Long after most of its competitors set up shop in Israel, chipmaker AMD (Advanced Micro Devices) is opening an R&D center in the area of the Israel Diamond Exchange in Ramat Gan. The center is based on Israeli startup Graphic Remedy, a developer of simulation software for graphics applications acquired by AMD in October 2010 for $5M.
And EMC, the Massachusetts-based specialist in IT and cloud computing, opened an R&D center in Beersheba. At the June opening Pat Gelsinger, EMC's COO, said, “Here, with the quality human capital and academe, we are planting the first seeds of a new Silicon Valley.”
Aerospace & Defense
More Iron Domes
The Pentagon said on May 26 that it planned to allocate $200M to assist Israel in the procurement of four more Iron Dome track & destroy systems against short-range missiles, as requested by President Obama. Lt. Gen. Patrick O'Reilly, head of the U.S. Missile Defense Agency, noted that Iron Dome, which intercepted several missiles fired from Gaza on southern Israel in April, “has proven efficient in wartime… the U.S. benefits from understanding and studying exactly how they've been successful with the Iron Dome system. U.S. troops could face similar threats from a combat zone.”
Israel currently has two of the Iron Dome batteries, developed and produced by Rafael Advanced Defense Technologies, deployed to protect the cities of Ashkelon and Beersheba in the southern part of the country. Purchase of four more has already been approved by the government.
In early June, the Defense Appropriations subcommittee of the U.S. House of Representatives approved increasing missile defense funding to Israel to $235M in 2012, up from the $217M 2011 allocation.
War Contingency Plan - A New Multi-Year Acquisition Plan for the IDF
Halamish, a five-year program (2012-2017) currently being formulated by the IDF, takes into account the possibility of war on multiple fronts, according to a report in the Jerusalem Post. The program, which covers military procurement and development plans, deals with three threats - Iran, then Hizballah and Syria in the north, and finally a conflict with Hamas in and around the Gaza Strip.
Defense Exports Remain High
Israel's defense exports exceeded $7.3B in 2010, according to a Defense News report quoting Defense Ministry officials. The figure was based on preliminary calculations made in mid-March; Defense News suggested that after follow-up contracts are added in, it would rise to the record $7.4B reached in 2009.
Defense Expenditures
Israel ranked fifth in percentage of GDP spent on defense in 2009, according to figures released by the Stockholm International Peace Research Institute (SPRI) in January. Saudi Arabia was highest in the SPRI rankings, spending 11.2% of its 2009 GDP on defense, followed by Oman, the Emirates, the Democratic Republic of Timor-Leste, commonly known as East Timor and Israel. Israel's spending, amounting to 6.3% of GDP, was down from previous years, when the figure was over 7%. For comparison, the U.S. spending was 4.7%, Jordan's 6.1%, Syria's 4.0%, India's 2.8% and Britain's 2.6%.
IAI Profits, Revenues Rise
Profits of government-owned Israel Aerospace Industries (IAI) rose by 170% to $46M in the first quarter of 2011 (compared to the parallel quarter in 2010), on revenues that increased 11% to $855M. The company also reported a capital gain from the sale of its 30% stake the Elisra Group, a developer of avionics and electronic warfare systems, to Elbit Systems for $24M. At the end of the quarter IAI had an orders backlog of $8.4B, 85% of it for export.
Meanwhile, the Globes reported that Dov Barahav, the former chairman of Amdocs, is the leading candidate to replace Yair Shamir as IAI chairman. The six-year term of Shamir is due to end in August.
Elbit's Romanian Deal
Elbit Systems, Israel's largest private defense contractor, has been awarded an $18.6M contract to upgrade C-130 Hercules transport aircraft for the Romanian Air Force. Elbit, in cooperation with Romanian companies, will install advanced electronic systems including some developed by its Elisra Electronic Systems subsidiary.
Americas Contracts
Two Elbit subsidiaries recently reported new contracts in Brazil and the United States. AEL, based in Brazil, has won a $65M contract as a subcontractor on the upgrade of 11 Brazilian Air Force F-5 warplanes, while its M7 US subsidiary signed a $15.6M U.S. Navy contract for logistic support systems for Fairchild C-26 and Cessna UC-35 aircraft.
Elbit and Embraer, the Brazilian aerospace company, have agreed to form a joint enterprise to produce unmanned aerial vehicles. The shares of the new firm will be divided 51-49 between Embraer and AEL. In the past, AEL has supplied Brazil with systems for Embraer's Turcano aeroprop trainer and the subsonic AMX fighter, and avionics for the Super Tucano light attack trainer.
“Safe” Grenades
Israel Military Industries (IMI) and the IDF have developed a mechanism that ensures that hand grenades carried by a soldier will not explode if hit by shrapnel or a bullet. The device was developed as the result of an incident last year, when a bullet hit a grenade carried by a major commanding a search operation against terrorists in Gaza and exploded, killing the officer and wounding other soldiers in the unity. The new mechanism, which has successfully undergone testing in recent weeks, prevents such a detonation by separating the sensitive explosives in a grenade from the operating mechanism.
Elta Deals
Elta Systems, a subsidiary of IAI, has sold airborne radar systems worth about $33M to undisclosed clients in Latin America, the company said.
Reciprocal Deal
General Dynamics (GD) will buy components for M1A2 Abrams tanks and Stryker armored personnel carriers as part of a $150 reciprocal procurement agreement signed with Israel's Ministry of Trade, Industry and Labor. GD will begin to manufacture the Namer, Israel's advanced heavy APC, for the IDF in 2013.
Moves Authorized
Prime Minister Benjamin Netanyahu has decided to allocate NIS19B (about $5B) to move the IDF's Intelligence Corps and teleprocessing operations to the Negev.
Tactical Satellite Communications
Israel's Gilat Satellite Networks has delivered Satrooper-1000, its man-portable tactical satellite communications system, to the IDF. The system's two components, which weigh about 20 kg., can be carried by two soldiers, and are easily assembled into an antenna capable of transmitting video data at rates of up to 80 megabytes a second.
Flying Elephant
Elbit has won a Defense Ministry contract to develop and supply an unmanned cargo air system capable of resupply missions to the front lines for the Israel Defense Forces. Nicknamed “the Flying Elephant,” the system will be able to fly for “a number of kilometers,” and will be equipped with a GPS system.
