Denel's Rooivalk helicopter. Picture: THE TIMES
Denel's Rooivalk helicopter. Picture: THE TIMES

Saudi Arabia has made a $1bn bid for a broad partnership with state-owned defence group Denel that would include acquisition of a minority stake in a joint venture with Germany’s Rheinmetall, a source familiar with the offer said.

Heavily dependent on imports, Saudi Arabia, the world’s third-largest defence spender, is seeking partnerships to develop its own domestic defence industry with the goal of localising half of its military spending by 2030.

Saudi Arabian Military Industries (Sami), the kingdom’s state defence company, told Reuters in October that it was in discussions with all major SA firms and aimed to conclude the first deals by the end of 2018.

According to the source, who asked not to be named due to the sensitivity of the talks, Saudi Arabia was targeting Denel’s 49% stake in Rheinmetall Denel Munition (RDM).

RDM is a joint venture formed in 2008 between Denel and Rheinmetall Waffe Munition GmbH, which holds the remaining 51% stake. It specialises in the development, design and manufacture of medium and largecalibre ammunition, including artillery shells.

A Rheinmetall spokesperson declined to comment.

The German government is reviewing all arms sales to Saudi Arabia after the killing of journalist Jamal Khashoggi in an Istanbul consulate.

Industry sources said RDM operates independently and is subject to SA law, which means exports from the unit are not subject to German government oversight. The sources said they did not expect that a change in the ownership of the venture would require a German government review.

Under the Saudi offer, Sami would also finance research and development in other Denel divisions, including Denel Dynamics, which develops and produces tactical missiles and precision guided weapons.

Denel and Sami would share intellectual property and under a new joint venture would target defence export markets in the Middle East and North Africa.

Finally, Saudi Arabia — already a top Denel customer for military vehicles, artillery munitions and radar equipment — would buy a certain amount of the group’s production.

The Saudis expect an answer by the end of December.

“Saudi Arabia has made a unique business proposition to the SA government. As our discussions are not finalised yet, we cannot provide any comment ,” Sami CEO Andreas Schwer said.

President Cyril Ramaphosa said last week Denel was “ripe for joint-venture partnerships”.

But he added that the government had not yet weighed the Saudi bid or proposals from a number of other suitors looking to partner with Denel.

A Denel spokesperson would not comment on any specific bid, saying that such negotiations take place on a state-to-state basis.

Ramaphosa’s spokesperson Khusela Diko said the president would only make a decision on the Saudi offer once it was discussed by the cabinet. “No decision has been made yet.”

The source with knowledge of the Saudi bid said Rheinmetall informally approached Denel’s board in 2017 to deepen its collaboration with the company.

The source said Rheinmetall had, like Saudi Arabia, expressed interest in Denel’s minority stake in RDM and its other divisions but was rebuffed.

Rheinmetall declined to comment.

Denel is grappling with an acute liquidity crunch and is struggling to pay salaries and deliver on R18bn of outstanding orders. After seven years of modest profits, it said last week it had made an operating loss of R1.7bn in the 2017/2018 financial year.