Fixed-Asset Fix

With mergers creating more unwanted property, finance executives must come up with creative ways of unloading it.

Fruit of the Loom had a vast amount of real estate, plant, and equipment in 1996, when all of its manufacturing operations — from spinning yarn and cotton into fabric to cutting and sewing that fabric into clothing — were done in the United States. The Bowling Green, Kentucky-based clothing manufacturer’s portfolio of fixed assets stood at $900 million, or 35 percent of its total. Thus, when the company decided to sew fabric offshore and consolidate textile production into five manufacturing facilities in the southeastern United States, the move saddled it with over 10 unneeded factories.

By January 1998, all of those unneeded factories had been sold, leaving the company with $514 million in fixed assets, or about 20 percent of its total. Selling the factories was not easy, although Fruit of the Loom did sell the plants more or less “as is” to other textile makers. “We tried to package the facilities with equipment that would enable other people to run them as they were run before,” says Calvin McKay, controller of Fruit of the Loom. To clinch the deals, the company had to agree to buy raw materials from the new owners until they got up and running.

Many other companies find themselves in a similar situation, with fixed-asset portfolios consisting of everything from plant and equipment to office space and warehouses. These assets account for between 35 percent and 50 percent of the typical Fortune 500 company’s assets, says Edmond Prins, senior partner at Corporate Asset Advisors, a Lighthouse Point, Florida, consulting firm. Those figures could rise as more companies engage in mergers and acquisitions. “Mergers result in at least 10 percent waste, in terms of excess assets, on average,” says Michael L. Silver, CEO of Equis, a corporate real estate services firm in Chicago.

More companies will be shedding excess assets in 1999, if projections of lower corporate earnings pan out. Silver expects a 20 percent increase in the volume of existing commercial properties coming onto the market this year, on top of a 25 percent to 30 percent increase in 1998.

New nonresidential construction, meanwhile, remains strong, at least in some quarters, despite signs of a slowing economy. While outlays for new plants and warehouses have weakened, Cushman & Wakefield, a real estate firm based in New York, expects 68 million additional square feet of suburban office space to be constructed in 1999, almost 60 percent more than the 43 million constructed last year.

All this could put pressure on prices of vacant properties, unless demand rises with supply. That’s unlikely. Investors such as real estate investment trusts (REITs) and pension funds have grown more conservative, and are now focusing on rental income rather than appreciation. REITs, for one, “were buying stuff that didn’t make sense,” says Janice Stancon, director of investment research at Cushman. “We’re looking for them to hone their portfolios. A lot of the stuff they’re going to sell [will] be lower quality.” So the simplest means of divestiture — vacating a building and looking for a buyer — is likely to become a less-viable option.

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