Italy has agreed to cooperate with Israel on development of a new spy satellite and to finance the bulk of the cost through reciprocal procurement, if the Ministry of Defense decides to procure the Alenia Aermacchi M-346 jet trainer for the Israel Air Force. The Italians have already agreed to procure at least two AWACS planes made by Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1).
The Italians' willingness to collaborate on the new spy satellite, a project that the defense establishment strongly wants to develop but lacks the wherewithal to do so, has greatly improved Italy's chances of clinching the jet trainer deal. Italy is competing with South Korea, which is offering its T-50 Golden Eagle, jointly developed by Korean Aerospace Industries Ltd. (KAI) and Lockheed Martin Company (NYSE: LMT).
Last week, the Air Force recommended the M-346 over the T-50, although it also said that both planes were good and worthy for training its combat pilots.
The new jet trainer will replace the Air Force's obsolete 1960s-era A4 Skyhawks. The Ministry of Defense is aware of Italy's complicated economic condition, and if it chooses the M-346, it will demand hefty guarantees from Aermacchi to ensure that the company meets its contractual terms and makes the reciprocal procurements.
Ministry of Defense director general Uri Shani is due to decide which trainer to buy within a few weeks. In a few days, the ministry's procurements director Shmuel Zucker, who is responsible for the negotiating teams with Aermacchi and KAI, is due to submit his recommendation.
The $1 billion Ministry of Defense jet trainer tender has entered its final lap, after months of tension in Italy and South Korea. The ministry insists that the country that makes the best reciprocal procurements offer will win the tender.
South Korea has also greatly improved its reciprocal procurement offer. In a new document, it has promised to procure Israel's Iron Dome anti-missile defense system. For the Ministry of Defense, this matches the Italian offer, since a flow of orders for Iron Dome batteries and interceptor missiles to its manufacturer Rafael Advanced Defense Systems Ltd. will greatly lower the cost of the system for the IDF.
Defense sources estimate the value of the jet trainer contract at $2 billion, including the cost of simulators and spare parts, set-up and maintenance, and the construction of infrastructures. Thor, the joint IAI-Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT) venture established for the jet trainer deal, will manage the deal.
Thor will sell flight time on the jet trainer to the Air Force. The company will secure the financing through an IPO on the TASE, and possibly with loans from banks in Italy or South Korea. The Ministry of Defense estimates that reciprocal procurements will offset at least half of the cost of the jet trainers.
Published by Globes [online], Israel business news - www.globes-online.com - on January 25, 2012
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