Spectrum Brands – Exiting China is a lot harder than starting-up

The Assignment

China was no longer a low cost manufacturing location for its Rayovac batteries and it needed to exit

  • Spectrum Brands Holdings is a global consumer products company offering aportfolio of leading brands providing superior value to consumers and customers.
  • The company is a leading supplier of consumer batteries and other consumer and commercial products.
  • Spectrum was manufacturing its Rayovac® and Varta® brand alkaline batteries at a wholly owned facility in Ninghai municipality, Zhejiang province in the Yangtze River Delta area of central Chinait acquired in 2004.
  • In the late 2000s, manufacturing costs began to rise in China as well as shipping costs to North America.
  • Spectrum management decided to close their facility in Ningbo and relocate the manufacturing back to the United States.
  • During the closure process, Spectrum management discovered it was significantly more complex to close a company in China than it is to start one up and they needed assistance to manage the disposition of the real estate and eventually the legal entity.

Tractus’ Solution

China’s complex market requires out-of-the-box thinking even for a simple real estate disposition

  • Spectrum Brands engaged Tractus to assist it in disposing of its 30,000 m2 facility and about 50,000 m2 of land in the Ninghai EDZ.
  • Tractus was commissioned to undertake an initial corporate secretarial audit to confirm whether the Spectrum had in its possession the more than 20 different types of approvals and permits required to own land, build and use a manufacturing facility and operate a company in China were. Without them, the company would not be able to dispose of its real estate assets.
  • As is typical in China, the result of the audit revealed that several of the permits and licenses were missing and we needed to (re)apply for some and request copies for others.
  • We conducted a benchmark study on the local real estate market and undertook a valuation of the facility using multiple methods such as discounted cash flow, sales comparable and market approaches.
  • The secondary market for industrial real estate and facilities with highly specific configurations, was not very liquid.
  • While we targeted the usual industrial companies that were expanding, because of the difficulty in obtaining useable industrial land with proper quota in China, the EDZ valued the land more highly than any private buyer.

Result

Sometimes the fastest way to close on a simple real estate sale is through a more complicated offshore equity structure.

  • To dispose of Spectrum’s real estate and facility assets in a more tax efficient manner, we structured the sale as an equity transaction, allowing it to not only dispose of the asset, but also its corporate entity, which would have required a time consuming and costly liquidation process.
  • To avoid complicated on-shore approvals, we structured an off-shore arrangement to simplify the transaction.
  • As with many real estate disposals in China, multiple unexpected obstacles and challenges arose from different stakeholders and the transaction was much more complicated and difficult to bring to a close compared to a typical real estate deal. Patience and persistence were required until the final signature.

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