A.O. Smith will pay $77 million for an 80% share of the new company
A. O. Smith Corp. has signed an agreement to purchase a majority interest in the water treatment business of Tianlong Holding Co. Ltd. of Hong Kong.
A newly formed company, A. O. Smith (Shanghai) Water Treatment Products Co., Ltd., will hold the assets of the business and supply reverse osmosis (RO) water filtration products to the China residential and commercial markets as well as export markets throughout the world.
This new company will be a wholly-owned foreign enterprise under Chinese law. A. O. Smith will pay approximately $77 million for an 80% share of the new company. The investment will be funded out of A. O. Smith’s existing cash flow and credit facilities, and the company is expected to earn in excess of its cost of capital in the first full year under A. O. Smith’s ownership. Within three years, the company expects to have a business that will generate over $100 million in sales with double-digit operating profit. The transaction is expected to close in the fourth quarter of 2009 subject to meeting customary closing conditions.
“We are excited about investing in the leading residential and commercial water purification company in China,” Paul W. Jones, chairman and chief executive officer of A. O. Smith Corp., said. “Entering the water treatment industry has been an important strategic initiative for A. O. Smith, and in Tianlong, we have an experienced and well-regarded partner who understands the market.”
“One of the biggest issues facing much of the world is securing clean drinking water, and Tianlong has experienced significant growth over the last several years meeting this demand. We expect customer demand will continue to grow in the future. We also believe water treatment and filtration complement our existing water heating business, particularly in Asia.”
Tianlong, with operations in China, manufactures reverse osmosis appliances, reverse osmosis elements, water softeners, industrial and commercial water treatment equipment, filters and components. The company markets its products under multiple brand names in China, including Chanitex, Pucakon, Datangwi, Lintangniao, Zhichenhe and Yongxianglai, and exports to more than 30 countries around the world.
Within 12 months of the close of the transaction, A. O. Smith plans to introduce a line of water treatment products in China to be sold under the A. O. Smith brand name. “This expansion will enable us to take advantage of the strength of the well-known A. O. Smith brand as well as our extensive distribution network,” Jones said. “Many of our major customers in China want us to expand our product line, and water treatment helps to fill the need. We also expect sales of consumables to increase as the installed base of product grows over time.”