Denel settles outstanding salaries, eyes R12bn order book

State-owned arms manufacturer Denel has settled all outstanding salaries, as well as PAYE tax and pension fund payments, after unlocking excess funds in the Denel Medical Benefit Trust.

Denel ran into liquidity problems more than two years ago and fell behind on paying workers’ salaries. The company was taken to court by unionised and non-unionised workers to force it to catch up on outstanding payments. Revenue fell from a peak of R8.2 billion in 2016 to under R2 billion in 2022.

“We have turned an important page in Denel’s history. We can now proceed with the restructuring and repositioning of Denel as a sustainable enterprise and a valuable and strategic asset for South Africa,” said Denel chair Gloria Serobe at a press briefing on Thursday.

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Riaz Saloojee, chief restructuring officer of Denel, said the company now has a clear and sustainable business case moving forward, with an order book of R12 billion – which is six times current annual revenues. There is potential to grow this order book to R30 billion, he added.

Saloojee said a streamlined Denel will focus on its areas of expertise in the fields of guided weapons, land defence systems, aircraft engineering and maintenance, and the delivery of complex integrated systems for security and cyber environments.

The new growth path is to create 1 000 jobs within three years, and 5 000 jobs by 2027.

Denel’s cash problems meant its 2 800 employees went without full salaries, some of them since May 2020.

The company was ordered to settle workers’ payments after trade unions Solidarity and the National Union of Metalworkers of South Africa (Numsa) took it to the Labour Court. A small group of (non-unionised) current and former employees took the company to the North Gauteng High Court, which ordered Denel to pay R13.2 million in outstanding pay.

Liquidity issues

In March, Minister of Public Enterprises Pravin Gordhan allocated Denel R3 billion to cover interest payments on the group’s escalating debt, but refused permission to use this for paying staff salaries.

Government provided recapitalisations to Denel of R1.8 billion in 2019/20 and R576 million in 2020/21, and extended a R5.9 billion guaranteed debt facility to Denel, according to DefenceWeb.

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The loss of an Egyptian missile contract contributed to the company’s liquidity crunch.

Trust funds

Serobe said the Denel Medical Benefit Trust had an actuarial surplus of R1.47 billion in April 2022, but it took two years to unlock this funding due to the nature of the trust and the court processes that had to be followed.

The defined benefit fund was over-capitalised and it made no sense that Denel, as the trust’s sponsor company, was unable to access this surplus, she said.

Nearly R1 billion was transferred to Denel in July, allowing it to settle all outstanding salaries and associated benefits.

“The new restructuring plan supported by us as the board and the shareholder will create a self-sustaining business with a significant order pipeline,” said Serobe.

“The sale of non-core assets is well under way and together with the recapitalisation application – which the Department of Public Enterprises has applied for through the National Treasury – will address the legacy debt and the introduction of liquidity. This will immediately improve profitability, [and] enable the company to retain and appoint able skills and leadership.”

Treasury and the Department of Public Enterprises have come under fierce criticism from employees and defence analysts for failing to act earlier to prevent a crisis that has resulted in the loss of critical strategic capabilities.

The company will now focus on generating cash through the sale of non-core assets and forging new partnerships.

Denel plans to restore its operational and reputational status, providing “vital leadership to the local defence industry that exports some R7 billion of mostly advanced manufactured products per year,” said Saloojee.

Denel’s intellectual property in a rapidly changing global defence environment will create opportunities to market the company’s products and form deeper strategic relationships, he added.

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