U.S. COMPANY BUYS MANUFACTURER OF VERA-E PASSIVE

C O N F I D E N T I A L PRAGUE 001350

SIPDIS

NOFORN
SIPDIS

EUR/NCE FOR FICHTE, PM FOR DOWLEY, OSD FOR SADOWSKA

E.O. 12958: DECL: 10/29/2016
TAGS: PGOV PREL EZ MARR MASS MCAP
SUBJECT: U.S. COMPANY BUYS MANUFACTURER OF VERA-E PASSIVE
SURVEILLANCE SYSTEM


Classified By: Political Counselor Michael Dodman
for reasons 1.4 (b) and (d)


1. (U) This cable contains sensitive business information.
Please protect accordingly.


2. (C/NF) Summary: Representatives of Rannoch Corporation, a
Virginia-based company specializing in air traffic control
(ATC) technology, purchased Czech company ERA A.S. on October

26. The new owners plan to quadruple production capacity for
the VERA-E in the first year, and state that this new
capacity would be aimed at supplying only the U.S., NATO
allies, and "responsible countries" that are acceptable to
the USG. Rannoch hopes to hold on to ERA for no longer than
two to three years. Rannoch executives say they place a high
priority on USG relations, thus avoiding factors that could
make prospective U.S. purchasers of the company less likely
to buy them out. End summary.


3. (SBU) Representatives of Rannoch Corporation, a
Virginia-based company specializing in air traffic control
(ATC) technology, met with members of Embassy Prague on
October 25 to provide details of their planned takeover of
ERA, the manufacturer of the VERA passive surveillance
system. (Note: ERA confirmed on October 27 that the purchase
had been successfully concluded. End note). Rannoch's
President David A. Ellison and Chief Financial Officer John

D. Young, described ERA's civilian air traffic control
equipment as a world leader, and said that Rannoch's
acquisition of ERA, its main competitor, would mean increased
success in civilian airport air traffic control tenders.


4. (SBU) Turning to military systems, Ellison also expressed
Rannoch's interest in expanding production of the VERA,
because of the increased margins on military technology
compared to the highly competitive civilian market. Ellison
said ERA is currently only able to produce four VERA systems
per year. Based on Rannoch's previous marketing efforts in
the U.S., Rannoch executives foresee potential for further
U.S. and allied VERA purchases, possibly for non-traditional
applications such as military testing and homeland security.
However, current orders from Pakistan mean that ERA's order
books would be full for some time. Ellison said Rannoch plans
to initiate a shift-based system, initially doubling
production capacity to four systems every six months before
increasing capacity again within a year to allow ERA to
produce 16 VERA systems per year. Rannoch is currently also
looking at purchasing the Czech Ministry of Defense's share
of the intellectual property rights in the VERA system.


5. (SBU) Both executives said that Rannoch would like to
avoid dealings with shady arms exporters and would thus
immediately undertake a review of ERA's business partners in
the area of international marketing. As a part of this
strategy, Rannoch intended to buy out Czech exporter
Omnipol's holding in ERA.


6. (SBU) Ellison also claimed that Rannoch would want to
ensure good relations with the U.S. Government. He
volunteered to send the Embassy a list of the countries
currently being considered by ERA as potential buyers of the
VERA system. Ellison noted that ERA seemed to have several
deals in the works considering VERA sales. In response to a
question from Ellison, Poloff explained that the governments
generally cannot share details of any classified discussions
that may take place between governments about licensing arms
exports (Note: It is an open secret in Prague that U.S.
security concerns are the reason the Czech Government has
refused to license several VERA sales. End note.) However,
Poloff also warned that several of the Czech companies
marketing VERA around the world had failed to get an export
license from the Czech authorities due to Czech foreign
policy concerns. Ellison and Young both were at pains to
point out that any poor relations with the United States
Government could hurt them financially: Rannoch sees its
investment as only a short to medium-term involvement with
ERA, ideally lasting about two years. They hope that one of
the large U.S. defense firms will want to buy ERA after
Rannoch demonstrates the real worth of the company. They said
ERA would be less appealing to a buyer if it came with the
baggage of strained relations with Washington. However,
Ellison did assert that VERA was not unique, and mentioned
that one of his Internet searches had turned up a Chinese

claim to have developed a similar system.

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COMMENT
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7. (C/NF) It appears Rannoch's purchase of ERA could lead to
a paradigm shift in the way the USG prevents the VERA system
from falling into the wrong hands. If Rannoch turns out to be
genuinely committed to prioritizing USG relations over
questionable sales, the United States may have the option to
prevent future problems even before the company begins
talking to the wrong prospective customers. Because Rannoch
is incorporated in the U.S., there is also the possibility of
the VERA now falling fully within the jurisdiction of U.S.
defense export licensing controls. From a bilateral relations
perspective such an outcome would be very favorable. If
Rannoch only applied for a Czech export license after
receiving a U.S. license, there would no longer be any U.S.
requests for license refusals in Prague, and the U.S.
Government might no longer be seen as a barrier to the
success of a prominent Czech company. Such an outcome would
also reduce political pressure on pro-U.S. officials in the
Czech government who have often stood in the way of attempts
to send VERA to inappropriate destination countries.
GRABER