Aeronautics a tale of intrigue.

Azerbaihan Aerostar Fleet

Oh what a tangled web we weave. An amazing story of skulldugary and intrigue. The sUAS market place is currently packed with snake oil salesmen and products that don’t do anything like what they say they do on the tin. For anyone wanting to buy a small civilian system the best advice would be see it fly at least twice before you buy. Also make sure its certifiable in the country that you wish to fly. If the man says it flys for 30 minutes make him fly it for 30 minutes. Go out on a day when a kite could cope and see if it can cope. I could go on…

Shay Aspril, Calcalist from Ynet News reports the sorry tale of Aeronautics. A company that has featured large in the major defense websites and print publications. A truly fantastic bit of invesigative journalism.

It was an Orbiter Mini that recently crossed the border from Mexico and crashed in a back yard in the USA

Ynet News

In April 2007, late businessman Aharon Shaked, who founded online gambling empire 888, flew to London for a meeting. From Heathrow Airport he headed to the city center and entered a hotel to meet a few Indian and British businessmen, who then controlled the unmanned aerial vehicle (UAV) company Aeronautics.

He left an hour later, holding a contract obligating him to purchase control of the UAV company in exchange for $30 million. A few hours later he was on a plane to Spain to attend a soccer match. Three months prior, in January 2007, Shaked was at Reviva and Celia, a café in Ramat Hasharon, with a senior businessman.

“We were conducting a very important meeting, and suddenly a tall stranger came up to us, introduced himself and asked for five minutes of Aharon’s time,” says the man who was with Shaked. “We looked at each other. This was an important meeting, but Aharon is a good man and told the man that he could sit for five minutes.”

The tall man who joined them was Avi Leumi, 46, CEO of Aeronautics. In the five minutes that he was allotted he charmed Shaked, and returning to his table he was already holding Shaked’s business card.

Leumi’s charisma enthused Shaked, and he told his brother Avi, his partner in 888, about the meeting. Between the café meeting and the flight to London, the two brothers met Leumi and were excited about the vision he presented. They envisioned the small UAV company that Leumi managed growing and selling UAVs around the world. They wanted it to become their new empire.

Aeronautics is indeed an interesting business story about a company that grew from a small start-up established by an entrepreneur named Tzvika Naveh into a company that currently sells UAVs in dozens of countries, most of them in the developing world. The company doesn’t come close to the sales posted by Elbit Systems or Israel Aerospace Industries, but it has successfully positioned itself in the public opinion as a growing company in a growing industry. It has been praised by financial newspapers and has been described as the bad boy that stings huge defense companies and successfully lands major contracts.

In recent years, Aeronautics has been linked to a number of significant transactions, it has acquired a few small defense companies, raised tens of millions of dollars and has considered issuing stocks. By doing so it has successfully attracted stock holders and employees, who invested money and left other jobs because they wanted to be part of something marketed as a huge promise. But according to a Calcalist Supplement investigation, reality doesn’t match the company’s sophisticated marketing. Technology that can’t always compete with that of its rivals, embellished data, a problematic reputation with clients and agents, and differences of opinion among shareholders and management are just a few reasons why Aeronautics is far from the company so many believed it would be.

Confidants and personal charm

According to conversations with dozens of sources involved in what is taking place in the company, and based on dozens of documents from the past decade associated with Aeronautics, the Calcalist Supplement investigation found that Aeronautics has survived in a tough market to a great extent due to two of Avi Leumi’s main qualities: His ability to charm those he talks to and his readiness to act, at times, in ways that stray from accepted business world norms.

Over the years, Leumi used his personal charm to recruit sophisticated clients and investors. To do so he often used public figures, with whom he had established temporary ties, and was savvy with the media. But the second quality – which often let him disregard accepted behavioral norms in the business world – is more disputed. Leumi is capable of committing to provide products in a short amount of time, knowing that he cannot do so, remain calm in the face of clients who received defective products and shake off agents who want to be compensated for recruited new clients. Leumi chooses to manage his company in an exclusionary way, with a number of loyal confidants, while embroiled with some of his managers. In April 2009 Michal Shaked, Avi Shaked’s daughter, wrote a recommendation letter for one of the company’s senior managers, who had been fired by Leumi. “The dismissal of the manager (name redacted) stems from an unfortunate disagreement between the company’s shareholders and the company’s CEO,” Michal Shaked wrote, referring to her father, Avi Shaked, who came to see Leumi as an annoyance shortly after the family invested in Aeronautics. But Avi Shaked, whose relations with Leumi are still icy, has only himself to blame. He and his older brother Aharon (who passed away last January), did not ask themselves why a group of foreign investors, headed by Sudhir Chaudhary of India, one of leading arms dealers in the world, were willing to give up their investment at a price that seemed so attractive. The Shaked brothers were impressed with Leumi and the deal Aeronautics signed two years prior, in Nigeria. It is unlikely that they were familiar with all of the details.

Bitter agents, suspected bribery

On October 11, 2005 Avi Leumi signed a contract, committing at least 21% of each transaction conducted by Aeronautics in the country to two Israeli businessmen operating in Nigeria. According to sources working in Africa, the commission rate was unusual.

The two Israelis who signed the deal are Alon Nalkan, an Israeli who has lived in Nigeria for the past 25 years, and Amit Sadeh, who worked as a shooting guide in Angola; he moved to Nigeria in the past decade and imported armored vehicles from Europe, forging ties with the country’s leaders. Leumi admits to signing such a deal with the two, but claims that a new deal was signed later, annulling the first one. This fact does not contradict the odd way events unfolded.

Three days after signing the original agreement with Sadeh and Naklan, and deal was signed establishing Aeronautics Nigeria, held by Sadeh, and Aeronautics Enterprises, formed in Cyprus.

On March 8, 2006, an agreement was signed between Aeronautics Enterprises and the Nigerian government, according to which Aeronautics would provide UAVs valued at €215 million to Nigeria. The signatories were Dr. Abiye Skibo, Nigeria’s Transportation Minister, Avi Leumi and Amit Sadeh. Three weeks later, on March 29, the first half of the sum – €107.5 million – was transferred to the Aeronautics Enterprises bank account, as an advance.

Following the money transfer, the Leumi-Sadeh-Naklan triumvirate disintegrated. According to sources familiar with the transaction, and according to media reports, Naklan was given a small sum of the money, while Sadeh was given the significant sum that he had been promised, making him wealthy. In the meantime, parliamentary sources in Nigeria’s capital, Abuja, and journalists began to investigate the affair, concluding that the sale was at least 100% more expensive than the market value of the products. This, as well as the fact that Aeronautics got the contract without a tender, raised a great deal of criticism.

Nigeria’s president fired Skibo and and senior military officials on suspicion that they were bribed by the Israeli company. The second half of the payment was not transferred to Aeronautics. According to sources involved in the transaction, Aeronautics did not supply most of the systems that it was obligated to provide for the sum that it had been paid.

These details are important because the Nigerian transaction is still considered to be what elevated Aeronautics to a different league, but mainly because members of the Shaked family were not familiar with most of the details garnered from documents signed by Leumi. They heard about a €215 million contract and that was enough for them. Had they thoroughly researched the foreign shareholders who had agreed to sell control of the company at a price that seemed ridiculous compared to the huge Nigeria contract, they may not have gotten all of the information at the shareholders’ disposal, but they would have learned something.

“The board of directors was never presented with a model of expenditures and revenues in Nigeria, what the money was for, what the profits were, what actually needs to be provided,” one of the people who served on the company’s directorate prior to the acquisition by the Shaked brothers told Calcalist Supplement. Another shareholder from that period added, “I didn’t see any documents and did not know what was going on.”

Foreign investors suing

Foreign shareholders were infuriated by Leumi’s exclusionary style, sued him in the Tel Aviv District Court and threatened to dismiss him from the company. The case was transferred to Attorney Robby Becher for arbitration, but prior to testimonies, Leumi ran into Aharon Shaked. He knew that was his lifeline. Foreign investors left the company and the case was closed.

And if that wasn’t enough, last week an Israeli businessman who was involved in the Nigerian deal received an unusual phone call. On the other end of the line he heard someone speaking English with an African accent, introducing himself as a representative of EFCC, a Nigerian organization investigating corruption. He also got an email from the same person. The Nigerians, it seems, are still investigating that transaction, and its associated corruption suspicions. The representative asked the Israeli businessman to provide documents linked to the transaction. “Their documents will provide them with information missing and needed to file an indictment against everyone involved in the deal, which is highly publicized in Nigeria,” says the businessman. The reverberations from the Nigerian deal, he believes, will be felt in the future.

Leumi breathed a sigh with relief. Aharon and Avi Shaked were pleased. They believed that Aeronautics would continue to grow and garner huge contracts in Africa, surpass its veteran competitors and sell UAVs around the world, and dreamed of a huge stock issue, like that of 888, which was issued for $1 billion. To garner a dignified image for their new investment, the Shaked brothers turned to Dan Halutz, who was concluding his tenure as Israel Defense Forces chief of staff, offering him the post of company chairman. But Leumi didn’t like the notion that someone aside from himself would appoint a senior official in the company, and thwarted the move. He leaked that Halutz was a candidate for the position of Aeronautics chairman, but traveled to Nigeria with a group of other businessmen, to an acquaintance with ties to the media. Halutz was crucified in the media, and was no longer a candidate. After that Aharon Shaked approached Shlomo Shamir, who had formerly held a senior position at NICE, to serve as company president and oversee Leumi. Shamir took the position, but left after a short while. According to an associate, he thought the company was mismanaged. Yaron Zecktzer was also unable to remain in the position for a year. Zecktzer, formerly a vice president at Orbotech, served as deputy to the CEO, until he was replaced by Udi Biderman, a former pilot and respected figure in the defense industry, who also decided to quit after a year due to his relationship with Leumi. Eli Gendler, former vice president of finances at VocalTech, was appointment vice president in charge of finances, a decision influenced by the Shaked brothers. He quit after a few months due to differences of opinion with Leumi. From then to date, Yanir Nardam, one of Leumi’s associates, has served as financial manager.

But it’s not just managers who have left. Some of the directorate resigned, protesting the fact they could not work with Leumi. Dr. Ehud Ganany, former CEO of Israel Military Industries and currently the CEO of Rabintex, served as chairman of the directorate for seven months, until deciding to quit. Another former director, who sold his stocks two years ago, told Calcalist Supplement: “I didn’t like the way the company was managed. The directorate received limited information. We requested detailed financial data because the balance sheets were disorganized and were not detailed, but they were not provided. Everything was handled as a ‘one man show,’ and we didn’t always trust what he said.”

Boeing recruited to save image

Avi Shaked is not the only one who began to understand that the exit he had purchased wasn’t very close. Osnat Roten – a partner in the Viola Private Equity Fund, which invested $20 million in Aeronautics in 2009 in exchange for 10% of the stocks and recruited $28 million, mainly from equity markets – understood this.

Viola joined the company after 2007 and 2008 balance sheets displayed one-time revenues from the Nigeria deal, which increased sales by hundreds of percentage points to upwards of $100 million. Viola was impressed by the acquisition of Motorola’s Maromim division, which was completed at the time, and by additional acquisitions.

They were also impressed by Leumi’s presentations and press reports, including one published in February 2009, according to which Aeronautics signed a NIS 90 million deal with Mexico to provide observation systems for the federal police. But, it was later revealed that the many millions in this deal turned into a few million, in what seemed like a sting that hit Aeronautics, since most of the money it was expecting stayed, to its shock and chagrin, with the mediator – BDS Securities, run by a group of haredi Jews. Leumi refused to discuss this transaction.

At this point Leumi sought to bring KCPS and Beresheet into the company, and understood that to convince them to invest, they needed to see something concrete. To that end, he advanced two main maneuvers. The first was collaboration between Aeronautics and Boeing in marketing the Dominator – an Austrian plane that a number of companies, including Aeronautics, converted into a UAV. The scope and future of the collaboration, which came two years after Aeronautics tried unsuccessfully to collaborate with defense giant Lockheed Martin, are unclear.

The second move that Leumi adopted to enhance the company’s prestige took place some 15 months ago, when he appointed Eitan Raff, at the time the head of Bank Leumi’s directorate, as a company director. In June 2010, after leaving Bank Leumi, Raff was appointed as head of the UAV company’s directorate. It should be noted that Bank Leumi, which Raff headed until recently, does not grant Aeronautics credit, due to banking considerations. Perusing its registrar indicates that all of the company’s assets, including its production plant and bank accounts are mortgaged to Bank Hapoalim and Bank Discount. At present, the company’s debt to the two banks stands at hundreds of millions of shekels. Calcalist Supplement learned that over a year ago Leumi Partners, Bank Leumi’s investment branch, reviewed an investment in Aeronautics, as per a request by Osnat Ronen, who had previously headed Leumi Partners. Sources who held various positions at Leumi Partners at the time told Calcalist Supplement that an investment in the company was reviewed and rejected.

One of the sources said that the value proposed, some $200 million, was too high for the output presented. Another source said that because Eitan Raff served as a director at Aeronautics, they refrained from investing in it. Incidentally, the money that Aeronautics sought to recruit from KCPS and Beresheet was supposed to be used to purchase control of camera manufacturer CONTROP, as Aeronautics already controlled 18% of the company’s stocks. CONTROP’s four founders control the rest of the stocks, and they disagreed over whether to let Aeronautics take over.

Some of the founders fear that Leumi will use their technology and push them aside. Therefore some were not surprised to read in this week’s Calcalist that CONTROP is preparing for a stock issue, a move that could block Aeronautics from taking control, which it has been planning for several months.

Poles, Dutch and Turks displeased

“When I worked there I felt something strange, another aspect, a contradiction between how things seem and how they really are,” a senior manager who worked at Aeronautics told Calcalist Supplement.

He said that the professional level in the company was significantly lower than what he had witnessed at other companies, and the number of orders that were supplied was lower than he expected. He said that he quickly understood that the company did not have the best technology for some of the products.

On the other hand, he heard that Aeronautics was a growing company that compensates managers generously, and was impressed with the offices. “Everything there is nice, hi-techy. You get there and see 10,000 square meters of spotless white floors and UAVs that look like a million bucks, and when you go to other UAV companies you often feel like you’re in a garage.”

The company’s flagship product is the Aerostar UAV. Professional sources claim that its technology is weaker than that found in its competitor’s products. “Mazda versus Lexus,” said a senior engineer who worked in the industry for years, when asked to to compare between the Aerostar and the Hermes 450, the equivalent product made by Elbit Systems, or the Searcher, made by Israel Aerospace Industries.

In addition to the Aerostar, Aeronautics developed the Orbiter, a mini UAV, which is considered more technologically advanced, but sold considerably less than the Aerostar. The rest of the products that Leumi generally discusses, like the Dominator and an unmanned helicopter, are barely sold or have yet to be developed.

That is actually Leumi’s main strength – the art of marketing and sales. His critics and supporters admit that he successfully took a company with mediocre technology and lead it to annual sales of upwards of $100 million, balanced the bottom line, successfully surviving in a tough market and nibbling away at his rivals’ income through creative marketing, quick responses and low prices.

For example, in January 2010, Aeronautics won a tender issued by the Polish government to supply UAVs after the company offered prices that its rivals could not match, and when Holland decided to deploy forces in Afghanistan, Aeronautics was the first company to offers its systems.

Yet these two transactions were more problematic than they appeared to be. The Poles are upset because Aeronautics agreed to supply the systems by September 2010 and did not do so. Sources involved in the Dutch deal claim that contradictory to what the company stated in March 2009, according to which it had signed an NIS 200 million contract with the Dutch government, the actual value was significantly lower. According to the sources, the Dutch government signed a contract with a British company that operated UAVs, leased from Aeronautics, in Afghanistan.

In other words, Aeronautics was just a subcontractor, and therefore its profits were significantly lower than the figures it reported. Furthermore, the Dutch military, which in the past preferred to purchase UAVs from American companies, and due to budget cuts explored other options, complained about the quality of the UAVs supplied by the Israeli company. One of the main complaints was regarding the deficient communication systems between the base station and the UAV.

Further dissatisfaction comes from the Turkish military, with whom Aeronautics signed a contract in January 2008 to supply Aerostar systems, including automatic take-off and landing systems that were to be provided within a year. According to senior sources in Aeronautics, two years after the deadline, the Turks have not yet received the take-off and landing systems, and it is doubtful that they will. In the meantime, Aeronautics employs and funds staff members in Turkey, in place of the automatic systems, until they are developed and provided.

That is the story in a nut shell. Apparently you can’t act fast, lower prices and continue to grow without giving something up. In Holland, Leumi sacrificed technological quality, in Poland and Turkey he sacrificed his operational reputation. In Nigeria, or in countries like Nepal, where partial orders were supplied, he sacrificed his credibility. Taking into account that those countries were the company’s bread and butter for years, Leumi will have to find suitable alternatives, and it is unclear whether they can be found easily. If not, 2011 could end with losses.

Nigerian government investigating

While recruiting big names to impress clients and investors, Leumi also specializes in recruiting high-level staff to attract employees. To this end, one of the people in the company closest to Leumi is Lieutenant Colonel (reserves) Ran Carmeli, who holds relatively few stocks and serves as vice president of development; he is tasked with recruiting former soldiers from the Air Force to the company.

“Carmeli is the company’s pretty face. He headed a squadron and everyone in the Air Force knows him. Because of him, former Air Force soldiers work at Aeronautics,” says a former employee who came to the company directly from the Air Force. Carmeli is one of the four people who comprise Leumi’s inner circle at Aeronautics, along with Moshe Caspi, who holds 10% of the company shares; Tal Shahar, who manages a flight line in the company, and Shahar Kravitz, CEO of subsidiary Comtact.

According to sources in the company, while it is hard for Leumi to trust people, he completely trusts Caspi, Carmeli, Shahar and Kravitz. He is also close to Linor Marder, the current vice president for finances, and Haim Nissim, vice president for acquisitions. Other managers who are not Leumi’s close associates complain that they are excluded from important company decisions.

Alongside the employees and shareholders who have a lot to say about Leumi, a number of the company’s agents have filed suits against him. The agents claim that Leumi’s modus operandi is to promise anything and everything in order to land the contracts that he wants, but when he has to stand by the agreements, Aeronautics has a tendency to disappear or deny certain terms.

Arms dealer Moshe “Chico” Britsh is waging a legal battle against Aeronautics, claiming that the sides agreed that he would be the company’s sole agent in Angola, with 30% commission for every sale in Angola. He claims that Leumi evaded this agreement and worked in Angola through the El Ar company. Leumi claims that it was not him, but rather another manager in the company, that reached the deal with Chico, and therefore he is not bound by it.

Some suits against Aeronautics and Leumi were filed over the Nigeria transaction. Eran Ron, a former Air Force pilot who is an agent in African countries, is suing Aeronautics, claiming that he was not paid 2% commission for mediating the deal in Nigeria. Colonel Paul Obi filed a suit in Nigeria, claiming that he is eligible for some payments from the deal. Aeronautics has not responded to the case there, and a Nigerian court ruled that Obi should receive $2.6 million in compensation, which Aeronautics has not paid.

According to Obi’s representatives, he is currently considering filing a similar claim in Israel, because Aeronautics does not recognize the authority of the Nigerian court. Arnon Har-Lev, one of the owners of Gal Aviation, helped mediate the deal. He sued Aeronautics, a compromise was reached and he received NIS 1 million.