Aerodrome Group reported that the government client with whom it signed a 137 million shekel order in October 2024 has now indicated plans to reduce the scope of the order. At this stage, the company has yet to receive final confirmation regarding the extent of the reduction but expects further updates soon. Investors reacted swiftly, sending the stock down 13%.

The specific order in question, valued at 73.6 million shekels, is part of the broader 137 million shekel agreement. According to Aerodrome, the government client is considering either a reduction in scope or a full cancellation. This order is one of five that the company received from the client.

The company stated that it is unable to assess the client's final decision at this time. However, it did confirm that it has secured payment on an 11 million shekel order, which the client stated would not be affected. Additionally, the client retains the option to place further orders in the future.

A Questionable Deal from the Start

We previously raised concerns about this deal. Aerodrome recently announced plans for a merger-acquisition transaction, prompting questions about where the funding would come from and whether the company was looking for a lifeline to fulfill its orders. If the company had such a substantial order in place, why would it bring in a partner at such a low valuation?

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There are plenty of red flags surrounding Aerodrome. The company was expected to thrive amid growing defense industry demand—after all, it’s a veteran player in the sector. However, its traditional business, which was based on providing services to various defense firms, has been shrinking. In a surprising shift, the company pivoted toward drone supply. But what does Aerodrome really have to do with drone manufacturing?

Following the announcement of its 137 million shekel drone supply deal, the company has since disclosed additional transactions suggesting that the potential isn’t as strong as it initially appeared. These include the establishment of a manufacturing operation where Aerodrome does not hold controlling interest, valued at a relatively low figure.

Investor Distrust May Be Justified

Several factors contribute to investors' skepticism:

1. Decline in Core Business – Aerodrome’s traditional business of providing UAV services has weakened.
2. A Shift into Drone Manufacturing – A sector in which the company lacks substantial prior experience.
3. Ongoing Losses – Raising concerns about a potential dilutive capital raise to bolster cash reserves.
4. Management Issues – Instability at the top is further eroding confidence in the company.

Leadership turmoil is a major concern. Senior executives and board members have been resigning at an alarming rate. Over the past few months, three board members have stepped down, including Hannah Perry-Zan and Maya Netzer, both of whom were appointed as recently as July. Their resignation letters revealed deep disagreements over company management and strong dissatisfaction with CEO and controlling shareholder Roy Degani (22%).

In her resignation letter to Chairman Zion Sapir, Netzer stated that while she sees significant potential in the company, she also perceives fundamental differences in management philosophy that hinder her ability to serve effectively. Perry-Zan echoed these concerns, writing that growth and progress would only be possible with leadership changes, but that such changes did not appear to be on the table.

The resignation of two independent directors within six months, both citing identical concerns about governance, casts serious doubt on the management’s ability to unlock the company’s potential. In response, the company appointed two new external directors on January 29: Danny Shimoni, former CEO of Hertz Israel, and Uri Pichoto, former CEO of the Israeli Geophysical Institute.

A Company Losing Its Edge?

The combination of a declining core business and management instability raises concerns that Aerodrome has lost its competitive advantages and is scrambling to pivot toward manufacturing. The latest announcement about a joint UAV production plant reinforces this narrative. Aerodrome was supposed to enter this joint venture with a major order in hand, yet instead, it is partnering under terms that give its partner control, including an option to purchase an additional 24% stake at a valuation of just 30 million shekels.

Now, with the government order potentially canceled, this entire deal could fall apart—or become far less attractive to the partner. Either way, it doesn’t indicate a strong business outlook for Aerodrome. If the entire company is valued at just 30 million shekels and Aerodrome will end up holding only 25% of the joint venture, how much can it really expect to gain from this deal?

The bigger concern is that this all points to financial distress—Aerodrome needs to either produce or import drones, and it handed over control of a new production facility to a partner at a valuation that suggests the opportunity is much smaller than originally implied.