Unlocking Asset Values

That’s an actual quote from the CFO of a major international chemical company a number of years ago.  Whether the statement was actually true at the time, or maybe involved a bit of alcohol-induced bravado, it nevertheless is illustrative of certain situations in the chemical industry where the value of a company’s assets (in this case, real estate) can be very high in relation to the value of the whole business.  Because this phenomenon is not that uncommon, it behooves both buyers and sellers to assess asset values in any potential transaction in addition to determining value based on earnings or cash flow.

For the seller, this could mean that the way to maximize value is to sell the business without the plant or real estate to a buyer who can produce in its own facilities, and then sell the plant and real estate separately.

“Our headquarters building is worth more than Monsanto.”

For the buyer, if there is a relatively high asset value in relation to the size of the total deal, then this could create more favorable financing conditions (if some of the purchase price will be sourced with debt) as well as give you some protection on the downside if the business is weak and a liquidation is called for down the road.  It can also give you a means to generate cash in the future by liquidating the asset in some fashion.

While real estate is probably the most common example of an asset that has a relatively high value, there are also many occasions when a company’s working capital is high relative to the value of the whole.  In the chemical industry, distribution businesses (as opposed to manufacturing) will very often have the highest proportion of working capital relative to value of the whole business.  Typically distribution businesses have low margins, sell at low multiples, and have relatively high amounts of accounts receivable and inventory.  Here too sellers and buyers need to take this into account.

Some examples taken from the real world:

  • Buyer does not need the plant site, Seller develops the site for higher end uses.  A company with a weak business based in the New York metropolitan area was located in an area of prime real estate.  The real estate had a value for non-chemical uses that was more than the value of the chemical business itself.  The seller sold the chemical business to a buyer who did not need the site, and then developed the real estate for this higher end use.
  • Sale of corporate headquarters.  Another New York metropolitan area example.  Here a company’s corporate headquarters was also in an area of prime real estate and the site was sold and leased back, generating significant cash flow and strengthening the company’s balance sheet.
  • Sell plant and real estate and build a replacement plant somewhere else. A recent divestiture of an alum plant and property by GenTek is an example of this type of deal.  Here is a quote from GenTek’s CEO:  “This transaction enables us to strengthen our balance sheet by unlocking the real estate value of an existing manufacturing location while at the same time providing cash to invest in a new facility to better serve our key water treatment customers in the Denver area.”
  • Buy business with very high working capital and reduce days sales outstanding and inventory levels.  The buyer of a company with net working capital (accounts receivable plus inventory minus accounts payable) equal to almost 50% of the selling price for the whole company was able to reduce days sales outstanding and inventory levels to increase cash flow in an amount equal to roughly 10% of the purchase price.
  • Distribution company with working capital levels almost equal to value of whole company.  A chemical distribution business for sale had a net working capital that was equal to approximately 65% of the total purchase price.  The buyer felt that this high ratio of liquid assets to purchase price gave it some comfort on the downside if the deal did not work out well.  The deal also was relatively easy to finance with that level of collateral for a bank to loan against.