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Elbit Systems Ltd (ESLT)
Tadiran agrees to do job for parent company,
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Monday, September 25, 2006 5:51:35 AM
Tadiran agrees to do job for parent company, at a loss
25.9.06 | 12:13 By Omer Sharvit
During the three-way merger of Elbit Systems (Nasdaq: ESLT), Tadiran Communications (TASE: TDCM) and Elisra, the minority shareholders at Tadiran screamed against the price they anticipated Tadiran would be forced to pay for Koor Industries (NYSE: KOR) holdings in Elisra. A year later the deal is long done, Elbit Systems bought out Koor's shares in Elisra instead of Tadiran, and Koor sold some of its Tadiran holdings in Elbit Systems, turning it into an NIS 5.4 billion defense industry colossus.
The upshot is that Tadiran was spared having to buy Elisra. But now the company has new issues.
Tadiran today announced an insider transaction, which involves it carrying out a project for its parent company (Elbit Systems) at a loss.
A foreign company had been supposed to make tactical data radio systems for Israel's Defense Ministry. But "difficulties arose" and Elbit Systems decided that Tadiran should make the systems instead. The contract is worth $23.6 million.
Tadiran had also bid in the Defense Ministry tender back in 2003, as a subcontractor for the Rafael armaments authority. But Rafael and Tadiran elected not to do the tender at a loss, and apparently the price they demanded did not satisfy the ministry, which chose Elbit Systems.
It is therefore rather odd that Tadiran today admits that the project, which it now has anyway, will cost it a gross loss of $4 million.
Tadiran insists that the gross loss will shrink to $2.6 million if the order is extended.
The company has several excuses to offer for accepting the project, even at a loss. One is be that it would be part of the Israeli army's great "digital ground forces" project. It also positions Tadiran to supply future radio-equipment demands for the army, and bolsters its status in world markets.
Tadiran also underscores that it accepted the job for Elbit Systems at the explicit behest of the Defense Ministry, and views it as a form of service to the nation. And anyway, investors in defense-sector companies should keep in mind that even the biggest projects, worth billions, aren't necessarily profitable.
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