The Valentec opportunity illustrates SKB’s ability to unearth the real value of an asset. In this case, the property was an industrial building located at the John Wayne Airport in Orange County, California. On the surface, environmental challenges left over from the property’s past life as a bullet manufacturing company made it undesirable to the untrained eye. For us, it represented an opportunity to dig deeper.
Recognizing the potential of the tenant’s current business manufacturing air bags for big-brand automakers, we pressed on. We discovered a tight market with development barriers, which made the property even more appealing for investment. So, we found a way to address the property’s soil remediation issues and leveraged a relationship with the proposed property manager to negotiate a sale before it was put on the market. We helped facilitate a successful reverse merger, which positioned the air bag company as the credit-worthy parent.
Our success with Valentec highlights our practice to look beyond face value. Furthermore, by leveraging our relationships with local service providers, we were able to acquire the building at a significant discount and sell it a year later for a substantial profit.
SKB learned that Valentec, a 145,000 SF industrial building in Costa Mesa, California, was available for purchase for $6.5 million. Located in a mature office and industrial park at the John Wayne Airport in Orange County, it is bordered by two of the county’s most heavily traveled highways—I-405 and Highway 55— and enjoys excellent visibility and easy access.
The tenant, a privately held company, had occupied the building since it was originally completed in 1968. Historically, the tenant's revenues were derived from defense contracts through manufacturing and distributing bullets. Their manufacturing process required the use of a large volume of oil to coat the bullets. Excess oil that remained on the site created an environmental problem that necessitated remediation before the State of California would issue a no further action letter.
Aside from the aforementioned environmental remediation challenges, the property itself is located in an under-supplied market with significant barriers for new development. Therefore, at first glance, the offering presented serious underwriting challenges. As SKB’s acquisition model is to look deeper for hidden value in what on the surface appear to be challenged properties, we launched a pre-purchase, due diligence process.
By the time of the sale, the tenant was no longer manufacturing ammunition. Due to Department of Defense cuts in contracts for the military, the tenant was forced to investigate private sector avenues where it could readily apply its manufacturing expertise. As a result, they started manufacturing airbags for the commercial automobile market and in 1994 created a new company for the specific purpose of expanding its automotive and airbag business with corporate headquarters at the property. The new company claimed it produced airbags cheaper than any other company in the world and had a roster of clients that included Mercedes, Nissan, Porsche, Honda and Renault.
Notwithstanding the tenant’s new manufacturing profile, the soil remediation challenges remained. SKB met with the California Department of Environmental Quality and learned the oil disposal issue could be solved with a monitoring device. The tenant agreed to correct all environmental issues on the property at its expense (at a cost of some $300,000 for the implementation of the remediation plan and the ongoing monitoring).
In addition, SKB developed a relationship with the proposed property manager/partner who originally built the property, offered decades of real estate experience and built more than 1.5 million SF of industrial space in Orange County in the prior 15 years. The proposed partner/manager had a strong relationship with the seller of the property and was able to negotiate the sale of the property to SKB, before it was put on the market. The seller was extremely motivated because of financial obligations from another proposed development.
The tenant consummated a reverse merger, making the virtually defunct bullet company the subsidiary and the air bag company, which had a net worth at the end of FY 1997 of approximately $2.5 million (on sales for more than $22 million), the more credit-worthy parent.
On the surface, Valentec looked like a losing proposition. Our intuition told us otherwise and our rigorous due diligence process exposed a significant opportunity. By cultivating a relationship with the proposed property manager and helping facilitate a successful reverse merger, we were able to acquire the property for a value that reflected its impaired cost and sell it less than a year later for a substantial profit.
*This overview does not necessarily reflect or predict the performance of any future transaction, or the actual performance of any other past transaction. The returns shown do not represent an overall track record, and returns and performance vary substantially transaction to transaction. In some cases transactions have resulted in the total loss of investment.
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