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. Last Updated: 07/27/2016

Irkut and Yakovlev Are Tying The Knot

ZHUKOVSKY AIRFIELD, Moscow Region -- NPK Irkut, the privately managed producer of Su-30 fighter jets, announced Wednesday that it will complete a merger with the Yakovlev design bureau within a year -- a deal that analysts said will give the government a run for its money in its plans to consolidate the mostly state-controlled defense industry.

"It will be a merger of two stock holding companies with a transfer to a single share, which we will try to finalize within a year. We've started the process already," Irkut president Alexei Fyodorov told a news conference at the 6th Moscow Aviation and Space Show.

Fyodorov said Irkut and Yakovlev are each controlled by private management.

Irkut vice president Valery Bezverkhny said his company is eager to take part in Yakovlev's project to build a Yak-130 combat trainer jet and that the merger is part of a strategy to bring aviation companies with viable projects under one roof.

Fyodorov said that up to a controlling stake in the merged company, which has yet to be named, may later be put up for sale to a group of investors.

He gave no financial details about the merger.

In addition to its main production facility in Irkutsk, the Irkut holding has grown in recent years to include controlling stakes in the Russkaya Avionika design bureau, which works on upgrades for fighter jets, and the TANTK Beriev design bureau, the developer of the Be-200 amphibious plane.

A successful private holding with progressive-minded management, Irkut is the darling of defense industry watchers who say it could serve as an example of industry-wide consolidation but also as a stick in the government's eyes.

Irkut, capitalizing on its lucrative export contracts for fighters, is quickly moving into civil aviation and is set to be the first Russian aviation company to tap international capital markets next year. It plans to raise $200 million by floating a 20 percent stake and issuing a eurobond.

The merger announced Wednesday is not likely to sit well with some government officials, who have been keeping a sharp eye on Irkut and other privately managed defense companies.

Last month, First Deputy Industry, Science and Technology Minister Alexander Brindikov took a stab at Irkut in a blistering attack on private businesses moving into the defense sector. He said private companies pose a threat to state security and would not be able to single-handedly save the powerful, cash-strapped industry.

The government wants to consolidate the aviation industry into two holdings by 2006. One of them would be AHC Sukhoi, which would unite the Sukhoi design bureau with two manufacturing plants in Novosibirsk and Komsomolsk-on-Amur and include the state's 38 percent stake in TANKT Beriev and 14.7 percent stake in Irkut.

Fyodorov complained that there is mistrust from the government toward private companies in the defense sector and current legislation discriminates against them.

Industry officials have their doubts about the feasibility of the new state holdings, and Yakovlev design bureau chief Oleg Demchenko on Wednesday took a stab of his own at the state plan.

"This is a real unification that is not done administratively but from the bottom, based on mutually viable projects," Demchenko said of the Irkut merger.

Yakovlev brings the Yak-130, which the air force picked last year as its new trainer jet, to Irkut's growing stable of aircraft. Yakovlev last month won a state tender to develop a short- to medium-range passenger jet, and it is a market leader in producing unmanned aircraft.

With Sukhoi, Yakovlev is taking part in the development of a fifth-generation fighter jet whose blueprint is to be finalized next year.

Fyodorov, who has been critical of the Sukhoi-led project, said Wednesday that he welcomed Yakovlev's participation as a subcontractor.

Irkut has a $3 billion contract on Su-30s for India and recently got a $900 million deal with Malaysia for the jets. It recently delivered its first Be-200 to the Emergency Situations Ministry, and is developing an MTA multipurpose transport plane together with Ilyushin and India's Hindustan Aeronautics Limited.

Fyodorov said Irkut will continue working with Sukhoi on contracts for Su-30MKI fighters but in terms of assets, management structure and future merger plans, his holding is miles ahead of AHC Sukhoi.

Sukhoi chief Mikhail Pogosyan said Wednesday that he expects the AHC Sukhoi holding to be formed by the end of this year. He also said Sukhoi and Irkut will sign an agreement outlining future cooperation between the two holdings, but acknowledged that any hope of creating a single holding was far out of reach for the time being.

Maxim Pyadushkin, a defense analyst with the Center for Analysis of Strategies and Technologies, said Irkut may be playing it safe with the new merger.

"By pooling more assets, Irkut might be protecting itself from government consolidation," he said. "It will be a large, private successful company, and no one will dare to nationalize it."

He said the merger is a win-win deal. For Yakovlev, it will bring much-needed investment and Irkut's marketing muscle, while Irkut will get to tap into the fast-growing global market for unmanned aircraft, he said.

Irkut posted a profit of 344 million rubles on revenue of $540 million last year. Yakovlev, due to changes in taxation, turned a profit of 280 million rubles on revenue of 260 million rubles.