Elul Group News Analysis – September 2012

General News Summary

Ebbs and Flows over Iran

Amid perceptions that Prime Minister Netanyahu and Defense Minister Barak were gently backing down from their presumed determination to use military means to stop now Iran’s nuclear efforts, the public debate over the propriety and effectiveness of an attack continues at a high pitch. It now appears that the possibility of a go-it-alone raid on Iran’s reactors and nuclear enrichment plants has receded.

During the first week of September, Netanyahu’s assertion that the world powers should set “clear red lines” that would convince Tehran, could be interpreted as a softening of his zero-sum-game demands that if Iran failed to abandon bomb-making, Israel would act. The statement jibes nicely with a New York Times report that U.S. President Barack Obama is planning a series of measures designed to placate Israel to hold off from military action, and that one of those measures is the declaration of similar lines. There have also been reports that Barak changed his mind and is now more disposed to opposing an attack, at least at this time, coupled with suggestions that it is no longer as inevitable as had been recently assumed.

The White House, according to the New York Times article, is currently debating how specific a public warning should be. Some Obama advisers, it said, think that Israel is asking for a public commitment for a worst-case U.S. military strike on Iran.

In a wider conflict, U.S. officials are said to resent what they see as Netanyahu’s overt interference in their presidential election by alluding to Republican nominee Mitt Romney. Inside Israel and abroad, voices arguing against an attack at this stage are getting more and more vocal. The latest to speak out is Ephraim Halevy, former head of the Mossad, intelligence service, said that Israel should continue to explore before going to war, a step he termed “absolute and irreversible.” And while he conceded that a nuclear Iran posed a grave threat, he said it did not necessarily mean the beginning of what he called “the countdown to the end of Israel’s existence.” At about the same time, Michael Hayden, former head of the CIA, told Haaretz that while the U.S. was more capable of carrying out an Iranian strike, a decision on whether or not to do so can wait.

At the same time, according to a report in Yediot Aharonot, top Obama administration officials have informed Iran that the U.S. would not support an uncoordinated Israeli attack on Iranian nuclear installations, and urged that Iran not retaliate against U.S. targets if such an attack was indeed launched.

On the Republican political fence, U.S. Rep. Mike Rogers of Michigan, chairman of the House of Representatives Intelligence Committee, recently said that he didn’t expect the Israeli government to authorize an attack on Iran until after the presidential elections.

Morsi’s Reassurances

President Mohamed Morsi of Egypt has reassured Israel in a public statement that his country will honor the peace treaty between the two countries and that his country will pursue a “balanced” foreign policy. Such statements were welcomed in Israel, though there is still considerable unease about the long-term intentions of Morsi, who was elected as the candidate of the Muslim Brotherhood and who has moved quickly to consolidate his power by summarily dismissing the top army leadership that ruled the country during the transition from Mubarak to Morsi’s current regime. Many sources say that Egyptian dependence on U.S. aid to shore up its flagging economy has influenced Morsi’s decision to maintain ties with Israel.

There are, however, those who take a less optimistic view. According to Ma’ariv, Foreign Minister Avigdor Lieberman recently told Prime Minister Benjamin Netanyahu that he was more worried by developments along Israel’s southern border than by the Iranian threat, asking that three or four divisions be sent to the Egyptian border area and that preparations be made for additional political changes in Egypt.

Egypt has reinforced its army in Sinai, with Israeli permission, with seven battalions to combat terrorism in the peninsula. Lieberman believes that Egypt is likely to breach the peace treaty and send more troops into Sinai without Israel’s consent.

According to Ma’ariv, Lieberman is concerned about the serious economic conditions in Egypt and the failure of the revolution that ousted Mubarak. He believes that the danger from Egypt is liable to escalate and to affect Israel.

Migron Evacuation

Police evacuated 50 families from Migron, a West Bank outpost, on September 2. The evacuation of the decade-old settlement, ordered by the high court, took place without incidence, two days before the deadline set by the judges.

Prime Minister Netanyahu said the demolition of Migron was a matter of law and not a political statement about the future of the settlement movement. “We have an obligation to respect the rule of law and an obligation to strengthen settlements,” Netanyahu said. “There is no contradiction between these two things.”

Chinese Visitors

Three warships of China’s People’s Liberation Army Navy (PLAN) docked in Haifa on August 13 for a five-day visit. Led by Rear Adm. Yang Junfei, deputy commander of the PLAN’s North China Sea Fleet, the Chinese were guests of the Israeli Navy to mark the 20th anniversary of Beijing-Jerusalem diplomatic ties.

South Sudan Pact

Israel Military Industries and the government of South Sudan have signed an agreement for the joint development of water resources. The pace covers desalination, irrigation, water purification and transport.

Academic Cooperation

Israel and India have signed a five-year $50M academic research agreement for collaboration in the sciences, humanities, technology and other fields.

The joint research program will support collaboration in the areas of the sciences, including life sciences and social sciences, information technology, high technology, the humanities and agriculture.

The Economy

Dismissals Up but Unemployment Down

Despite layoffs in recent months culminating in a three-year high in July, the Central Bureau of Statistics says that the unemployment rate among persons over the age of 15 fell to 6.5% in July from 7.1% in June and 7% in the second quarter. Participation in the labor force also rose to 59.8% in July from 59% in June. Globes explains the apparent anomaly by saying that the figures indicate that more people are entering the labor force, but cannot find jobs, and that laid-off employees are unable to find new jobs quickly.

Budget Talks Delayed

Prime Minister Benjamin Netanyahu has postponed discussions on the 2013 budget until after the Jewish holidays, which end on October 9. Netanyahu will use the extra time given to him to raise support for proposed austerity measures. Finance Minister Yuval Steinitz’s proposed 2013 budget includes a NIS 3B ($750M) reduction of the defense budget as part of a plan to cut government expenditures by NIS 13B over the next two years. If a defense budget cut proves to be impossible, the Treasury’s alternative is to slash child allowances paid by the National Insurance Institute, reduce salaries in the public sector and shrink the budget of the Transport Ministry.

Coalition partners Shas and Yisrael Beitenu oppose drastic reductions in the budget, and Netanyahu may have to choose between passing a budget and new elections, according to political sources.

Deficit Swells

Israel’s fiscal deficit continues to swell, reaching NIS 4.4B (about $1.1B) in August 2012, 37.5% more than the deficit of NIS 3.2B in August 2011. The 12-month cumulative deficit rose to NIS 36.8B (about $9.2B) for the 12 months from September 2011 to August 2012, or 4.1% of GDP – more than double the Treasury’s 2% of GDP original target, and the 3% of GDP revised target. Shortfall of tax revenues due to the economic slowdown is the largest single factor in the deficit’s growth.

Growth Higher than Expected

Israel’s GDP increased by an annualized 3.2% in the second quarter of 2012, exceeding analysts’ 2.5% forecast and the annualized 3.1% and 2.8% in the first quarter of this year and the last quarter of 2011. The figures, based on preliminary estimates, put GDP growth at an annualized 3% for the first half of the year.

Bezeq Upgrade

Bezeq Telecommunications, Israel’s largest phone company, will invest billions of shekels in a fiber optic network, the company’s board of directors decided in early September. The project will replace the company’s copper wire network over 5-8 years. The investment will be approved in stages, depending on the ability to deploy the network and demand.

Gas Outlook Positive

Barclays Capital has called Israel’s energy outlook “positive” due to the 2013 scheduled start of production of the new Tamar offshore gas field and other factors, including contracts with Israel Electric Corp.

In its report, Barclays said it anticipated that the gas discoveries at the Tamar and Leviathan fields, as well as geopolitical changes in the Middle East, will change the oil majors’ attitude toward Israel. “Historically, super-majors have been reluctant to look at Israel for different reasons, including limited potential resources, limited domestic market opportunity, a natural gas focus and a challenging geopolitical situation. We believe all of this has changed: the Levant basin is world class, with over 30 TCF of gas discovered so far and a full exploration calendar; not only has the domestic opportunity grown but there are also export opportunities; beyond the natural gas discovered…” It added that Barclays believed that “Israel offers a more stable business environment than its neighbors and that companies that were reluctant to invest may view the 30-40 TCF in the Eastern Mediterranean as a possible addition to a larger asset portfolio.”

Excelling Exporters

Mazor Robotics, Nordia Springs, Chic Cosmetics and RNM Food Industries were the winners of a competition to determine the biggest exporters of the future, sponsored by Yediot Aharonot’s Calcalist economic supplement and the DHL shipping firm. Mazor, from Caesarea about halfway between Tel Aviv and Haifa, has developed a device that almost entirely eliminates the risk of serious complications during back surgery, Nordia, from a moshav agricultural community in the center of the country, supplies automaker Audi with springs especially suited to high-temperature conditions, Chic, based in Yavne south of Tel Aviv, produces organic cosmetics and RNM, of Migdal Haemek in the north, makes organic tahini.

Housing Starts Down

In another sign of the slowing economy, housing starts in the second quarter of 2012 declined by 23% from the corresponding quarter of 2011 and 8% from the first quarter of this year, according to the Central Bureau of Statistics.

Education Spending Up

National expenditure on education totaled NIS 73.4B (about $18B) in 2011, a 5.8% increase in real terms over 2010. National expenditure on education per capita rose by 3.8% in 2011, after rising 3.6% in 2010, and 0.5% in 2009.

Old-Age Home for Indian Cows

Tel Aviv-based Alefbet Planners, a specialist in the design of dairy barns together with Afimilk, a supplier of milking machines owned by Jordan Valley kibbutz Afikim and the Fortissimo venture capital fund, have contracted with the Indian government to build retirement homes for cows. According to a report in Haaretz, the project, which includes veterinary staff and special sensors to determine when a cow is in distress, involves 10 farms and will cost about $5M. India’s federal constitution recognizes the cow as a holy animal warranting special consideration. The financing and operation of the bovine hostels will be financed in part by the federal and provincial governments and by dedicated funds based on a contribution tax levied on the price of milk.

Minimum Wage to Rise

Israel’s minimum wage is due to increase by NIS 200 to NIS 4,300 a month, beginning on October 1. The increase is based on an agreement between the Ministry of Industry and Trade and the Histadrut trade union federation.

Lake Victoria Project

Israel and Germany are participating in a project designed to improve conditions on and around Kenya’s Lake Victoria. In an agreement signed by Deputy Foreign Minister Danny Ayalon last month, the three countries agreed to desalinate waters of the lake and upgrade fish farming, largely using technologies developed in Israel. About 5 million people in Kenya, Uganda and Tanzania live around the lake and depend on it for at least part of their livelihood.

Israeli Fridge in Space

A cooler, designed and developed on kibbutz Ein Harod (Yehud) has landed on Mars as part of NASA’s Curiosity probe to the red planet. It’s the work of Ricor Cryogenic and Vacuum Systems, based on the kibbutz in the north of Israel, which specializes in cryogenic coolers – cryocoolers – miniature refrigerators designed to reach very low temperatures, for military, space and commercial applications.

Finance & Investment

IDB Losses Increase

Nochi Dankner, the controlling shareholder in IDB Holdings, reportedly is attempting to bring in a strategic investor after the concern reported losses of NIS 1.27B (over $300M) in the second quarter of 2012. The figure compared to a loss of NIS 821M (about $205M) in the corresponding quarter of 2001. According to Globes, the holding company’s grave financial situation prompted Dankner to cut his own salary by 50% for a year, starting in September, and for company officers to accept 10-15% salary cuts.

Meanwhile the 60-year old Hebrew daily Ma’ariv, an IDB property, apparently was saved from closing by Discount Investment Corp.’s investment. Globes said the last injection of capital, in the form of an owner’s loan, comes in addition to a previous $90M investment in the newspaper. Ma’ariv reportedly plans to stop publishing its print version on weekdays, when it will have only a news website, but continue with a print weekend edition on Fridays.

In addition to the general erosion of the printed press in Israel and the rest of the world, Ma’ariv – as well as its larger rival Yediot Aharonot – has been hit hard by the success of Israel Today, a freely distributed daily newspaper, owned by American casino magnate and strong supporter of both Prime Minister Netanyahu and Republican presidential candidate Mitt Romney – Sheldon Adelson.

New Pitango Fund

Israel’s Pitango Venture Capital has closed the first stage of its $150M sixth fund, Pitango VI, after receiving a commitment received by an “anchor” investor. Pitango is to continue raising money for an overall fund of $250M, to invest in early-stage and mature, growth-stage companies. Investments will be made in a wide range of industries, including Internet and media, mobile apps, data storage and enterprise computing, telecommunications infrastructures, software, semiconductors, renewable energy, and the life sciences (both drug development and medical devices).

Fortissimo Fund

Fortissimo Capital, based in Rosh Ha’ayin, has completed raising $265M for its third fund. A private equity firm investing in later-stage Israeli public and private tech companies, Fortissimo increased the size of its fund from $250M due to heavy demand.

Mergers & Acquisitions

Buying Spree

Small and middle-sized Israeli companies made about 40 foreign acquisitions in the first half of 2012, according to a survey by the BDO accounting firm. There were only 20 similar acquisitions in all of 2011. Most of the acquisitions were in Europe, with the majority in the electronics and metals fields.

Clal Sells U.S. Subsidiary

Israel’s Clal Insurance Enterprises, a subsidiary of IDB Holding, has sold its Clal US Holdings subsidiary to National Indemnity Company (NICO), itself a subsidiary of Warren Buffet’s Berkshire Holdings. Purchase price for Clal US, which includes the GUARD insurance company, was $221M.

Facebook-Waze Talks

Executives of Facebook, the world’s leading social networking site, have been in Israel for discussions with Waze, the developer of traffic reports apps. Globes says that the purpose of the talks “is not known, but the two companies are reportedly headed for collaboration, possibly involving the use of Waze’s application via Facebook. Alternatively, Facebook may acquire Waze.”

An acquisition, if it were to take place, would be Facebook’s third purchase in Israel. It acquired Face, a facial recognition company, for $60M in June 2012, and Snaptu, which provides access to Facebook from mobile phones for $70M in 2011.

Founded in 2007, Waze has raised $67M to date and has over 20 million subscribers in 45 countries.

Qalcomm-Design Art

International chipmaker Qualcomm has acquired Design Art, an Israeli developer of wireless communications components. Purchase price is reported to be $120-$140M. Qualcomm, which specializes in mobile phone chips, has a NASDAQ market cap of $105B.

Science & Technology

Mellanox on the Rise

Mellanox, a provider of high-speed Infiniband connectivity solutions for enterprise computer networks based in Yokneam, near Haifa, and Sunnyvale, California, continues to be one of the hottest companies on the high-tech market. In late August, the firm which was founded in 1999 had a market cap of $4.75B; at the time of its initial public offering on NASDAQ, in 2007, Mellanox’s share price was $17.

Chiasma Raises $38M

Chiasma Ltd., a drug development company based in Jerusalem’s Har Hotzvim high-tech park, has raised $38M in a new round of financing. Abingworth, a London-based investment group dedicated to the life sciences, led the round, whose participants also included, MPM Capital, Arch Venture Partners, F3 Ventures, and 7 Med Health Ventures LP. Total investment in Chiasma, which is developing oral alternatives to intravenous drugs, rose to $91M, the largest amount raised by an Israeli life science company in several years.

Palo Alto Causes a Stir

Shares of California-based Palo Alto Networks rose by 34% on the first day after its July initial public offering on NASDAQ, giving the firm established by Israeli Nir Zuk a market cap of $3.9B. The firm headed by Zuk, who was one of the five founders of Israeli firewall developer and current market leader CheckPoint Software, specializes in next-generation network security. Its IPO raised $260M.

Thermogyn Exits China

Thermogym, a manufacturer of heat exchangers for the aesthetic medical and defense markets, is moving its production facilities to Israel from China, according to a report in Globes. Officials at the Tel Aviv-based company said the move was made at the request of European customers seeking to improve monitoring and quality-checking of the company’s products.

Moran’s New Baby

Serial tech entrepreneur Dov Moran, best known as the father of the Disk-on-Key while he headed Israel’s M-Systems, has unveiled what could be a revolutionary new computer keyboard. Moran’s KeyView Ltd. has developed smartype, new type of keyboard with a sophisticated built-in display meaning that users will not need to split their focus between a keyboard and computer screen. Smartype’s advanced embedded display is said to eliminate typing errors and maximize productivity; it includes various apps, such as email notification for Google’s gmail and Microsoft’s Outlook, a clock, photos, and weather updates. KeyView was founded by Moran and CEO Uri Brison in Israel two years ago.

Miracle Cure

Haifa-based Pluristem is getting ready to apply for Food & Drug Administration (FDA) Orphan Drug status after Placental eXpanded (PLX), its placental stem cell therapy, saved the life of two Israeli patients. In August, the company said that the clinical condition of a 54-year old woman suffering from terminal bone marrow failure had dramatically improved after injections of PLX, allowing her to be discharged from Hadassah Medical Center in Jerusalem, where the treatment took place. The other similar case involved a 7-year-old girl with plastic bone marrow who was successfully treated in May in Hadassah.

Rocket Technology

Engineers at Rafael Advanced Defense Systems responded to an Israeli doctor’s urgent call for help and created an artificial jawbone made of materials developed for use in stunner anti-missile missiles. The artificial jaw was implanted in Vladislav Zaitsev, who had been a missile engineer before he immigrated from the former Soviet Union more than 20 years ago. Due to infection, Zaitsev’s jawbone had gradually eroded to the point where conventional bone-transplant therapies were no longer possible. Two Rafael engineers were present at the implant operation performed by Dr. Roy Connolly of Lapland hospital in Rehouse.

Better Taxis at Schiphol

Israeli electric-car specialist Better Place has built a battery replacement station at Amsterdam’s Schiphol Airport to serve 10 electric taxis operated by three Dutch taxi operators. The Renault Fluence ZE vehicles will be able to refuel at a second replacement station being set up in Amsterdam itself. The electric taxi project is the first green venture financed by the EU’s Ten-T decolonization infrastructure program.

Aerospace & Defense

Arrow 3 Test Soon

The U.S. and Israel plan the first full, all-systems test of their joint Arrow 3 missile defense system soon, according to a report in Defense News. Arrow 3, designed to counter Iranian Shah intermediate-range ballistic missiles as well as threats in the future, is designed to deal with salvos of missiles rather than just single projectiles, and to intercept and destroy them outside the atmosphere.

The two-stage Arrow 3, designed by IAI – Israel Aerospace Industries can reach twice the altitude of the earlier Arrow 3, but weighs only half as much.

Trainer Deal Signed

Italy’s Mechanical Defense group and Israel have signed contracts completing the $1B Israeli purchase of 30 M-346 jet trainers from Aermacchi Alenia. The contracts also include reciprocal deals under which Italy will purchase an OPSAT-3000 high-resolution optical satellite from IAI, and aerial early warning systems from IAI’s subsidiary.

Tank Team Named

Brig.-Gen. (Res.) Didi Ben-Yoash will head a Defense Ministry team planning Israel’s tank of the future, according to a report in the Israel Defense website. Ben-Yoash, a former high-ranking Armored Corps officer, served as head of the Armor School and international marketing for Rafael Trophy active-defense system for armored vehicles.

Arkia Buys Airbus

Arkia, Israel’s domestic airline has signed a deal to acquire four Airbus, the neo aircraft from Airbus, the plane-building arm of European Aeronautic Defense and Space Co. The order is the first by the Israeli airline, and is valued at $400M. According to a report in the Wall Street Journal, the aircraft will be configured in a single economy class. Arkia plans to use the planes to expand routes to European and domestic destinations.

Israeli Systems On F-35

The Pentagon has agreed to an Israeli request to fit F-35 warplanes with Israel aerial warfare systems, for the plane to be acquired by Israel, according to a report in Yediot Aharonot. Israel’s order of 19 of the next-generation aircraft, purchased at a cost of $2.75B, is due for delivery in 2015-16. Among the Israeli defense contractors who may be included in the project are IAI, whose secure communications equipment has been requested by the Israel Air Force, and Elisra, the Elbit Systems subsidiary that supplies electronic warfare systems to the IAF. According to a Reuters report, the Pentagon has already approved Elbit’s role as an electronic warfare systems subcontractor on the F-35, a deal potentially worth $450M in revenue to the Israeli defense contractor.

IAI is negotiating with F-35 contractor Lockheed Martin to supply 811 wing pairs for the new aircraft. The potential deal is valued at about $1B.

Elbit Helmets in F-15

Next-generation helmets developed by Vision Systems International, a subsidiary of Elbit Systems and Rockwell Collins, will be fitted into the F-15 Silent Eagle, a stealth version of Boeing’s combat jet. The helmet allows the pilot of the multi-role jet fighter to aim and fire weapons using new tracking technology and a display projected onto the visor. VSI’s system is said to require lower maintenance than competing systems, while offering lower cost and markedly higher-quality ergonomics and reliability.

South American Deal

Elbit has been awarded a contract worth “millions of dollars” to supply its Hermes 450 and Hermes 900 unmanned aerial vehicles to an unnamed South American country. (The Israel Defense website identified the customer as Colombia.) It was Elbit’s fifth major UAV deal, following contracts with the Israeli Ministry of Defense, Chile and unnamed foreign countries.

Ackerman Exits

Elbit president and CEO Yossi Ackerman is due to retire next March after more than 30 years with Israel’s largest private defense contractor. In mid-August, Elbit’s board accepted Ackerman’s retirement request and confirmed the appointment of current executive vice president Bezhalel Machlis, 49, to replace him. Ackerman, 63, headed Elbit for 16 years.

Arms Sale Report

Israel is one of the world’s top arms exporters, and most of its customers are developing countries. Israel is also one of the world’s biggest arms buyers, according to a report to the U.S. Congress by the Congressional Research Service (CRS) at the Library of Congress.

Between 2004 and 2011, the years covered by the report, Israel was eighth among the 11 largest arms suppliers with sales of $12.9B, putting it behind the U.S., Russia, France, the U.K., Germany, China, and Italy. Arms deliveries totaled $10.6B in 2004-11, including $1.8B in 2011. (Arms deliveries in any given year are often the result of agreements signed in previous years).

According to the CRS report, Israel’s arms transfer agreements with developing nations totaled $8.7B in 2004-11, putting it in seventh place among the eleven arms suppliers listed (behind the US, Russia, France, the UK, Germany, and China, and ahead of Italy, Ukraine, Spain and Sweden).

The report also puts Israel among the world’s largest buyers of arms, mostly from the U.S. The country signed agreements for the transfer of $9.5B worth of arms in 2004-11, (including $5.9B in 2008-11), making it the ninth largest arms buyer. Saudi Arabia topped the list (with $75.7B in arms purchases), followed by India ($46.6B), and the United Arab Emirates (UAE) ($20.3B).

Navy Prepares for New Threats

The Israel Navy is preparing for new threats in the Eastern Mediterranean Theater by participating in the development of advanced weaponry, according to a report in Globes. This includes the Barak 8 surface-to-air missile project, designed to intercept naval missiles. IAI is developing the Barak 8 together with the Indian army, which is financing the project. The new system will soon enter the trials phase and could be operational within 18 months to two years.

Expanding threats at sea and the larger number of tasks to be undertaken includes defending the offshore gas rigs, which according to the navy requires about NIS 3B to be fully operational. This amount includes purchasing and bringing into operation new systems and at least four large naval vessels to protect national interests in Israel’s economic waters. In addition, the Israel Navy is also interested in additional development of the Protector, Rafael’s unmanned naval vehicle system. Several Protector systems are already in use by the Navy, with positive results.

Bulletproof IDF Grenade

The IDF has developed a new fragmentation hand grenade that does not explode when it suffers a direct hit by a bullet, according to a report in Israel Today. The paper said that the development was initiated after a 2010 incident in which two soldiers were killed when a bullet hit a grenade in the vest of one of them. The new grenade will replace hand grenades, in IDF service for 50 years. All existing grenades will be phased out over the next decade or so, the paper said.

IMI-Rafael Squabble

The Defense Ministry apparently plans an international tender for the new active protection systems, after failing to persuade Rafael and IMI (Israel Military Industries) to jointly produce a system, according to a Defense News report. The ministry wants a single system for both the Merkava Mark IV tanks and Namer (Leopard) armored personnel carriers (APCs), reversing an earlier plan to equip Merkava with Rafael’s Trophy (known in Hebrew as Me’il Ruah, or Windbreaker) and the Namer APC with IMI’s Iron Fist.

G280 Passes Test

The G280, an executive jet made by IAI and Gulfstream Aerospace, has received certificates verifying airworthiness from American and Israeli aviation authorities, only of the final steps before delivery to customers, according to a report in Globes. IAI and Gulfstream, a wholly-owned subsidiary of General Dynamics, have been developing the G280 and its systems for six years.

Back to top