Elul Group News Analysis September 2011
General News Summary
Prime Minister Benjamin Netanyahu had gained two important points at the September opening session of the U.N. General Assembly. Israel appeared to have passed the threshold of what may have been one of the most difficult political and diplomatic challenges in its 63-year history. In the eyes of Israelis, he transmitted an exposition of Israel's position in his September 23 Assembly address and by his apparent success in preventing a majority vote for Palestinian statehood without negotiation with Israel in the Security Council. The Palestinians seemed determined to push forward their efforts to gain full U.N. membership and recognition of their statehood, bypassing the elementary bilateral negotiations with Israel that have been ceased by them.
The General Assembly address of the Palestinian President Mahmoud Abbas covered no new ground. Abbas launched a litany of accusations against the Israeli occupation, while Netanyahu elaborated on the Israeli narrative. Both speeches failed to meet one another. Both men said they were willing to renew talks immediately, at the same time Abbas stated preconditions prior to entering into serious talks and denied responsibility for the failure of the last previous effort to talk peace, in the fall of 2010, during the reign of premier Olmert.
The Palestinian request, which Abbas submitted on September 23 to Secretary-General Ban Ki-moon, will go first to the Security Council. An intense diplomatic effort appears to have succeeded in blocking support of the resolution by nine of the 15 council members. In the next stage, the Palestinian petition is certain of passage by the General Assembly majority, carrying with it recognition as a non-member state with limited U.N. membership. The process will not be immediate: Abbas wants the Security Council to act within weeks, though it may take months, and the General Assembly may take even longer.
Recognition of Palestinian statehood would not appreciably change conditions in the West Bank territory of the Palestinian Authority or in Gaza, ruled by Hamas Islamist extremists, or lands under Israeli control. But it may increase isolation of Israel on the diplomatic front and allow the Palestinians, as a non-member state, to join various U.N. bodies and challenge Israel's role as an occupying power in International Court of Justice.
The Israeli government has not taken an official position on what actions it would take if the statehood maneuver succeeds, but individual and influential ministers and Knesset members have threatened severe sanctions, from withholding the tens of millions of dollars Israel collects for the PA in the form of customs duties and other taxes.
In the meantime, the diplomatic process seems dead. Palestinian sources almost immediately rejected an initiative by the Quartet of Mideast peacemakers endorsed specific timelines to restart talks while putting the Palestinian U.N. bid on hold. A statement by the Quartet members — the U.S., EU, U.N. and Russia — set interim deadlines on the way to renewal of talks and reaching of an agreement no later than the end of 2012.
The Quartet statement was radically different from what diplomats had been hoping to draft since it became clear that Abbas would not back down. U.S. and European officials had been trying to craft a statement that would itself outline parameters of the negotiations, including a reference to borders being based on the 1967 lines and affirm Israel's identity as a Jewish state. It focused on deadlines and did not mention potential deal-breakers, including the right of return for Palestinian refugees to immigrate to Israel or the status of Jerusalem.
Defense Budget Cuts
Prime Minister Benjamin Netanyahu has approved an agreement to cut the defense budget by NIS 3B ($830M) a year. The cuts will not come from the base budget, but from the supplement based on a report of a committee headed by former Finance Ministry Director-General David Brodet after the Second Lebanon War of 2006, Finance Minister Yuval Steinitz pointed out. In addition to the cuts, for the first time in Israel's history, the Treasury will have authority to supervise the defense budget, including military salaries and other perks.
Turkish Crisis
Relations between Turkey and Israel, the two major non-Arab Middle Eastern countries and former allies, continued to deteriorate after the contents of the U.N.-commissioned Palmer Report on the 2010 interception of the Gaza-bound “peace flotilla” were leaked to the New York Times. According to media accounts, the report said that Israel was within its rights in intercepting the convoy, but that IDF troops had used excessive force after boarding the flotilla's flagship, the Mavi Marmara. In the attack nine Turkish nationals were killed, while trying to attack the Israeli troopers.
Israel has repeatedly turned down Turkish demands for an apology and for payment of compensation to the families of the Turks who died in the clashes. Efforts to patch up relations between the two countries continued intermittently over more than a year till the leaking of the Palmer Report. Turkey, which insists Israel accept full blame for the raid and its consequences, began with the expulsion of the Israeli ambassador along with other senior diplomats and the downgrading of bilateral relations to the level of second secretary. Prime Minister Recep Tayyeb Erdogan announced that all relations with Israel, including defense industry and military contacts, were suspended (in fact they have been frozen for over a year) and said that Turkish warships may maintain constant surveillance of Eastern Mediterranean waters to ensure “freedom of navigation,” presumably including the passage of subsequent “peace flotillas” to Gaza.
Speaking to a meeting of Arab League foreign minister in Cairo, Erdogan called Israel's government “a barrier to peace,” and urged recognition of a Palestinian state. In his actions and his rhetoric, many sources suggest, Erdogan is seeking to establish himself and Turkey as the leaders of the Muslim Middle East after the demise of the Mubarak regime in Egypt. However, he behaves like a new bully in the neighborhood, seeking a fight in high profile.
Writing in Yediot Aharonot, Guy Bechor suggests that the spurt in Erdogan's anti-Israel rhetoric is motivated by economic realities. Dr. Bechor, a journalist and senior faculty member of the Interdisciplinary Center in Herzliya, notes that Turkey is in dire economic straits, with unemployment running at 13% and a deficit (as a percentage of GDP) almost as large as that of Greece. Furthermore, Bechor says that the Turkish economic bubble is about to burst, as loans taken by the Erdogan government to create a spurt in economic growth before the last Turkish elections come due.
From Erdogan's point of view, according to Bechor, the impact of this impending economic disgrace can be diverted by creating “an artificial crisis vis-à-vis Israel, a spin that the whole world will be talking about instead of talking about sinking Turkey.” The Mavi Marmara incident took place more than a year ago, Bechor says, expressing doubt that Erdogan has made his moves only because of the still-unpublished U.N. Palmer Report, which says Israel was within its rights to intercept the “peace flotilla” to Gaza, though it used excessive force in the Mavi Marmara operation.
Gas Dispute
Noble Energy of Texas, a partner of Israel's Delek in the Leviathan and other natural gas fields, began drilling in the Cyprus Block 12 license area, in the Mediterranean just west of the Israeli concessions. Turkey threatened to send warships to the area and announced it would itself begin exploratory drilling off Cyprus.
Blow to Egypt?
Deteriorating relations with Israel could cost Egypt $1B dollars and 70,000 jobs, according to BDI COFACE, a leading Israeli business information firm. Though trade between the two counties is “fairly small,” (Israel exports amounted to only $148M last year, while imports were $355M, 75% of which was natural gas), Egypt is vulnerable to the 2004 qualified industrial zones (QIZ) agreement with Israel. The agreement gives Egyptian duty-free exports to the U.S. of final products that include 10.5% Israeli inputs. Egypt's 2010 exports under QIZ were about $1B, while QIZ businesses employed 70,000 people.
Tensions with Egypt heightened in early September, after an Egyptian mob attacked the Israeli Embassy in Cairo, forcing its evacuation. Earlier, the London-based al-Hayat reported that Israel had authorized the deployment of 1,500 Egyptian troops in the Sinai Peninsula (demilitarized under the 1979 Israeli-Egyptian peace treaty) in the wake of an August terrorist attack across the Israeli-Egyptian border, in which eight Israelis were killed. Five Egyptian policemen were killed, apparently by accident, by Israeli troops in hot pursuit of members of the terror cell that carried out the border attack. Israel subsequently apologized for the incident, and Egypt said it would not recall its ambassador from Tel Aviv.
Gas Running Out
Natural gas from Israel's Yam Tethys field, in the Mediterranean off Ashkelon, is running out faster than expected, according to a report in Globes. Globes said that production in the Mari B well there has fallen by 30% in the past few days, due to seawater seepage. Mari B, in operation since 2004, is Israel's sole remaining source of natural gas until newer fields farther north are developed. The situation, including supply of gas to the Israel Electric Corp., has been complicated by disruption of deliveries of Egyptian gas across Sinai, forcing increased use of Mari B gas. According to Globes, revised estimates have production falling in early 2012, a year earlier than anticipated.
Google Viewing Israeli Streets
Google Inc. has begun the collection of images for its Street View in Israel, starting with Jerusalem. Google cars and tricycles will drive through Jerusalem's streets, including the Old City and the Mahane Yehuda open air market. Later, the vehicles will collect images in Tel Aviv, Haifa, along the shores of Lake Kinneret (the Sea of Galilee) and Dead Sea, the Ramon Crater in the Negev, Nazareth, and other sites. Special arrangements will be made for the security of sacred sites in Israel, according to reports.
Yachimovitch Wins
Sheli Yachimovitch won a runoff election on September 21, becoming the second woman to be elected leader of the Israel Labor Party. Yachimovitch, a former TV journalist who made her mark in the Knesset as a consumer advocate, defeated former party leader Amir Peretz in the runoff. Yachimovitch and Peretz had been the two top vote-getters in the first round, topping former minister Yitzhak (Buzie) Herzog and former party leader Amram Mitzna to head the party led by the late Golda Meir in the 1970s. The leadership contest became necessary in January, when former party leader Defense Minister Ehud Barak and four other Labor MKs split away to form a new party, called Atzmaut (Independent in Hebrew).
Yachimovitch's challenge is replenishing the depleted ranks of Labor, once the dominant party in Israel politics, but today reduced to a minor player, the fourth largest party behind the Likud, Kadima and Yisrael Beitenu.
The Economy
5.5% Unemployment
Israeli unemployment declined to 5.5% in the second quarter, the lowest figure since the method of calculating joblessness was changed in 1985, according to the Central Bureau of Statistics.
C-o-L up 0.5%
August inflation amounted to 0.5%, the Central Bureau of Statistics reported. For the past 12 months, the inflation rate is 3.4%, higher than the 1-3% target range set by the government. Recent protests about the high cost of living seem to have had a mixed effect: In August, food prices declined by 0.2% while housing costs rose 1.3%.
IMF Prediction
Israel's GDP will slow to 3.2% in 2012, down from a projected 4.8% this year, according to the International Monetary Fund's just-published World Economic Outlook.
Vindication Late
Billionaire brothers Sammy and Yuli Ofer did not live to see their company taken off the list of firms subject to U.S. sanctions for trade with Iran. The American announcement in mid-September came two days after Yuli Ofer, one of the siblings who built a financial empire that includes shipping companies and the Israel Corp., died at the age of 87. Yuli's 89-year-old brother Sammy passed away three months earlier. One of the companies owned by Ofer was placed on the State Department's sanctions list in May for selling a tanker, the Raffles Park, to Iran for $8.5M. Ofer did not know that the purchasing company was an Iranian front.
Potash to India
Israel Chemicals has signed a $490M deal to sell 1 million tons of potash to India, the company's largest market last year. Deliveries are due to be completed by March 2012.
Competitiveness Report
A government committee exploring ways to increase competitiveness in the market has recommended forbidding big businesses from owning both financial and non-financial operations. In a preliminary report the panel, headed by outgoing Finance Ministry director-general Haim Shani, also recommended measures to limit the ability of the powerful families and groups dominating the Israel economy to “pyramid” control of multiple company ownership. Prime Minister Benjamin Netanyahu, noting that the committee was formed long before this summer's wave of consumer protests, said that implementation of its recommendations would lower prices by increasing competition.
Citi R&D Center
Citigroup, one of the world's largest banks, will set up a research and development center in Israel in December, with the help of an NIS 93M ($26M) Israeli government grant. The U.S.-based bank is already recruiting high-tech employees for the center.
Finance & Investment
S&P Gives Israel A+
International rating firm Standard & Poor's has upgraded Israel's long-term foreign-currency sovereign rating from A to A+ with a "Stable" outlook, four steps below AAA. S&P also reaffirmed Israel's local currency rating at AA-. S&P said the rating “reflects our view of Israel's improved economic policy flexibility as a result of strong growth and careful macroeconomic management… Israel is on a credible path toward continued government debt burden reduction and stronger external indicators.” The rating firm cited Israel's responsible fiscal policy, which supports reducing the debt-to-GDP ratio and expected tax revenues from the natural gas discoveries.
Fighting Fake Viagra
Israeli pharmacy chain Super-Pharm and Pfizer Inc. have set up a joint online venture to sell Viagra, in an effort to prevent sales of counterfeit versions of the erectile dysfunction treatment. Super-Pharm will sell Viagra to men with a valid prescription via its website and deliver the pills to the buyer's home or other location for free. Viagra has a 43% share of Israel's erectile dysfunction treatment market, which itself has an estimated annual turnover of NIS 40M ($11M). Super-Pharm estimates that 800,000 tablets for the treatment of erectile dysfunction are sold every year in Israel. The two companies note that an estimated one in every 100 Israelis buys counterfeit drugs, either knowingly or innocently.
India's Bio-Light Investment
Dilip Shanghvi, the CEO of India's Sun Pharmaceutical Industries, is investing $10.5M in Israel's Bio-Light Sciences. Israel Makov, the former head of Israel pharmaceutical giant Teva, recently took over Bio-Light with the intention of building a company that invests in “clusters,” companies in complimentary fields that collaborate rather than compete. Bio-Light is developing two clusters: in oncology through its takeover of Micromedic Technologies Ltd., specializing in cancer diagnostic activities; and in ophthalmology, based on Bio-Light subsidiary iOptima Ltd.
Mergers & Acquisitions
GTCR-Fundtech
Fundtech Ltd., an Israeli provider of software solutions for the financial services industry, has announced its intention to drop a planned merger with the S1 Corp. and accept a purchase offer from GTCR, a Chicago-based private equity fund. Tel Aviv-based Clal Industries currently owns 58% of Fundtech.
Tyco-Visonic
Visonic Ltd., a Tel Aviv-based developer of home security systems, has been sold to Tyco International for $100M in cash. Visonic will continue to operate as an independent company whose products will be sold under the Tyco Security Products brand name.
Strauss Buys Russian Brand
Strauss Coffee has purchased the Ambassador coffee brand from the Sucafina Group. Ambassador freeze-dried instant, roasted and ground coffee products are sold in Russia, Ukraine and Moldova. Purchase price, including a non-competition agreement from the sellers, is $10.4M.
Great Hill-Plimus
Great Hill Partners, a Boston-based private equity fund, has acquired Israel's Plimus for $115M from Susquehanna Growth Equity and other investors. Plimus, based in Herzliya and Fremont, California, builds and manages online businesses for thousands of software publishers, Web hosting companies and online retailers. It has a user base of more than 6,500 small to medium size business and rapid growth enterprises worldwide with a platform that supports many business models including SaaS and cloud-based solutions.
Attunity-RepliWeb
Boston-based Attunity Ltd., a real-time data integration software developer, has acquired RepliWeb Inc. for $7.8M. RepliWeb, based in Coconut Creek, Florida, develops enterprise file replication and manages file transfer technologies. Both companies have a strong Israeli component. Yossi Moriel, RepliWeb's founder and CEO, worked for an elite computer unit at Israel's Ministry of Defense, and Shimon Alon, Attunity's CEO, previously held senior posts at Israel's Scitex and Precise Software Solutions.
Biodata-Lablife
BioData Ltd., based in Rosh Ha'ayin northeast of Tel Aviv and Houston, Texas, has bought all the assets of former competitor LabLife Software Inc. of the U.S for a few million dollars. Biodata, which has developed a modular, web-based laboratory research management system for principal investigators, lab managers and researchers, was purchased for $5-$10M by the Digital Science Division of Macmillan Publishers Ltd., owners of Nature Publishing Group.
Frutarom-Flavor Systems
Frutarom has acquired Cincinnati, Ohio-based Flavor Systems, which develops and produces sweet and savory flavors for the food and beverage industry, for $35M in cash. It was the fifth acquisition this year for the Haifa-based Frutarom, which markets and sells over 20,000 products to more than 10,000 customers in 120 countries, has 27 R&D labs and 45 sales and marketing offices throughout the world and operates 20 production facilities in Europe, North America, Israel and Asia. Previous 2011 acquisitions were Aromco of the U.S., Christian Hansen of Italy, EAFI of Britain and the Scandinavian Rieber and Søn.
India's Maini Buys Tomcar
Markstone Capital Partners has sold control of Tomcar, the designed-and-developed-in-Israel maker of off-road vehicles to Mani, a private Indian concern specializing in the automotive industry. Tomcar, which is now headquartered in Michigan, produces small commercial and recreational vehicles built to go “anywhere and back.”
NICE-Fizzback
NICE Systems, based in the high-tech belt northeast of Tel Aviv, has acquired Fizzback, a British developer of voice-of-the-customer feedback solutions for $80M in cash. Fizzback's Software as a Service (SaaS) VoC solution sends customers' requests for feedback about a specific interaction or transaction via mobile, web or social media via call centers, point of sale locations, mobile applications or the Internet.
Science & Technology
Life Sciences Fund
Migdal, Israel's largest insurance firm, and Israeli investor Mori Arkin's AccelMed investment firm, are teaming up to invest NIS 80M (about $23M) in life sciences. AccelMed, founded two years ago to exploit opportunities in medical devices during the economic crisis, has sold two of the three companies it originally acquired: Ophthalmic Imaging Systems, sold to Merge Healthcare Inc. for $30M, and Edge Medical, sold to Dutch Claymount Assemblies BV. Migdal, owned by Assuracioni Generali of Italy, has NIS 130B in assets under management in insurance, pension and provident funds, and financial services.
Teva's New Tack
Israel's Teva, already the world's largest manufacturer of generic pharmaceuticals, is moving to enhance its position on the branded market with the establishment of a venture capital fund to invest in Israeli drug companies, according to a report in Globes. Branded drug operations currently account for about 30% of the revenues of Teva, which is based in Jerusalem and Petah Tikva. Expansion of the branded drug side of its business has become a goal of the firm's new strategy, marked by the acquisition of Cephalon of Frazer, Pennsylvania, for $6.8B earlier this year.
Teva has signed an agreement to build a $50M pharmaceutical plant in Yaroslavl, Russia. The plant, due to be completed in 2014, will produce oral medicines for Russian and other markets.
Joining CERN
Israel has become an associate member of CERN, the European Association for Nuclear Research, pending Knesset ratification of an agreement signed in Geneva in mid-September.
Spanish Connection
Siemens Concentrated Solar Power, based in Beit Shemesh about halfway between Jerusalem and Tel Aviv, has been awarded a $50M contract to build a 22.5-megawatt solar-thermal electricity-producing plant near Barcelona. The contract with Spain's Termosolar Borges SA was the third in Spain for the former Solel Solar Systems, which was acquired by Siemens in 2009 for just over $400M. The first of the three projects, with a total value of $150M, is due to begin providing energy to the Spanish grid in October. The latest project, called Abantia, will supply electricity to 30,000 households in the Catalonia region in 2012.
Aerospace & Defense
Third Battery Deployed
Israel deployed a third battery of the Iron Dome defensive system against short-range rockets and missiles in late August, to defend the port city of Ashdod. Ashdod, which has about 225,000 residents and is 38 km (23 miles) north of the Gaza Strip, has been the target of Grad rocket attacks fired from Gaza by Hamas, Islamic Jihad and other Islamic radical groups.
The two batteries deployed earlier, near Beersheba and Ashkelon, have successfully intercepted a large number of Grads. Ha'aretz, quoting unnamed defense sources, reported that the two batteries had a 90% interception success rate during this summer's flare-up of rocket attacks.
Satellite Deals
Spacenet Integrated Government Solutions, a U.S.-based subsidiary of Israel's Gilat Satellite Communications, has won a contract with the U.S. Future Commercial Satellite Communications program. Earlier, SIGS, which was set up to target the U.S. military market, won contracts with the U.S. Naval Air Warfare Center Aircraft Division and the NATO Consultation, Command, and Control Agency. Value of the deals to Gilat, which builds terminals for satellite communications, was not announced.
Cardom Order
Israel's Defense Ministry has placed a $40M order for Cardom self-propelled 120-mm mortars with Soltam, an Elbit Systems subsidiary. Cardom integrates the 120-mm mortar with propulsion, navigating, fire-control and aiming systems.
Urban "GHOST" Unveiled
Israel Aerospace Industries (IAI) unveiled GHOST, a new unmanned aerial vehicle designed for urban use, at an August exhibition in Washington, D.C. An innovative, small hovering unmanned platform, GHOST weighs about 4 kg (9 lbs) and is capable of providing real-time intelligence to ground forces operating in urban areas. Equipped with an automatic vertical takeoff and landing system and twin rotary engines, GHOST can hover for up to 30 minutes.
According to IAI, GHOST's man-machine interface and operational concept are based on the principles of computer games, making the system extremely intuitive to operate and requiring little training. The entire system can be carried in backpacks by two soldiers and includes two platforms, batteries, and a command and control unit with communications.
Lucky New Name
Gulfstream and IAI, faced with a decline in worldwide sales of executive aircraft, have renamed their G-250 jet the J-280 in an attempt to attract wealthy Chinese buyers, according to a report in Globes. The number “8” symbolizes wealth and luck in China, the paper said.
Gulfstream and IAI's sales had dropped sharply since the worldwide economic slumped in 2008. Prior to that, they sold about 70 per year, a number that has fallen to 15-20 since the crisis.
Baharav Confirmed
The IAI board of directors on August 31 confirmed the appointment of Dov Baharav as the company's chairman. Baharav is the former general manager and CEO of Amdocs, the world leader in telecommunications management systems.
Elbit-Embraer JV
Israel's Elbit Systems has entered a joint venture with Embraer, the Brazilian aerospace giant. Embraer Defesa, an Embraer subsidiary, will own 51% of the new company, Harpia Systems; the remaining 49% will be in the hands of AEL, Elbit's Brazilian subsidiary. As part of the deal, though, Embraer Defesa will acquire 25% of AEL.
The new company will develop unmanned aircraft, avionics and simulators, initially for the Brazilian market.
IMI Privatization, not Merger
State-owned Israel Military Industries (IMI) will be privatized rather than merged with Rafael. Agreement on the plan was reached in August by Defense Minister Ehud Barak, Finance Minister Yuval Steinitz and Ofer Eini, head of the Histadrut trade union federation. In 2010, IMI reported a loss of NIS 164M (about $45M) on sales of NIS 1.9B. IMI blames much of the loss on pension payouts to workers who have retired.
Elbit Revenues Down, Backlog Up
Haifa-based private defense contractor Elbit Systems reported a record $5.649B orders backlog at the end of the second quarter of 2011, the fifth consecutive quarter in which the backlog has increased. About 78% of the backlog is in foreign orders, the company said. Gross profit amounted to $200M, on revenues of $691M.
GD Collaboration
Defense contractor General Dynamics has signed a collaboration deal with MaxTech, a developer on unique communications technology, principally for military and security use based in Yavne, between Tel Aviv and the Ben-Gurion International Airport. Financial details of the deal, which includes a licensing agreement for the use of MaxTech technology, were not disclosed.
MaxTech's technology supports the creation of ad hoc communications networks without infrastructure such as antenna, with up to four times the number of users due to its wide bandwidth.
Starling Sells Business
Starling Advanced Communications Ltd. has entered into a graduated sale of its entire non-military satellite communications business to an unnamed buyer it describes as “a major international company, a world leader in the communications market.” Purchase price is $13.1M. Elron Electronic Industries owns about two-thirds of Starling, and a third is held by Rafael Development. Starling develops low-profile antennas, enabling high-speed communication for aircraft via satellite.
