Back in October, I brought you news of a prospective land sale by Pelikan for the purpose of having a logistics center built next to their existing manufacturing plant in Peine-Vöhrum, Germany. That plant counts nearly 240 employees among its labor force, and it is the site of production for Pelikan’s fine writing instruments, amongst other things. It was suggested by management at the time of the original announcement that the proceeds from the sale of a non-operating asset such as this could be put to use modernizing the plant, something that is long overdue. Pelikan’s current facilitates located on the Pelikanstraße date back to the early 1970s and are now nearly fifty years old. By all accounts, the plant is showing its age and falling behind the times, becoming increasingly antiquated and less well suited for its intended purpose. Lined up to buy the nearly 6.2 acre tract of land was the Hillwood Group, a U.S. based investment company with German headquarters in Frankfurt am Main. They are a developer of residential, commercial, and industrial real estate with operations in the United Kingdom, Germany, and Poland. The city council of Peine approved the development plan by a large majority back in October, affirming their keen interest in keeping Pelikan’s plant at its current location. That same city council last met publicly on the evening of Thursday, February 23rd, the proceedings of which were reported in the Peiner Allgemeine by Jan Tiemann. Council members were informed immediately prior to the proceedings about a potential change in plans, a development not previously forecasted. Read on to learn about the new proposal coming to light.

Details are sparse at the moment but the reporting out of Germany suggests that a new proposal may be on the table. In addition to the land adjacent to the factory, the factory and the land that it sits on would now be sold to the Hillwood Group as well. To what end you ask? The scheme being entertained is for the existing fifty year old factory to be demolished with a new plant built in its place. Pelikan would then lease space in the new factory from Hillwood. Pelikan would occupy space in the newly constructed logistics center until construction of the new plant was completed. When questioned about the issue, Harald Schmidt, the technical plant manager for Pelikan’s factory, had this to say; “After consultation with our managing director Mr. H. K. Loo, I can inform you that there is no information from Pelikan at this stage and at this time.” For now, it appears as if Pelikan is not ready to make any public comments on the situation and further details are necessary to get a clearer understanding of their objectives. For what it is worth, Mr. Schmidt did not deny the report. Still, I would treat this news as hearsay for now until Pelikan comments publicly, clarifying their intentions for the long held property. In the world of corporate finance, a transaction of this nature is known as a sale-leaseback. This is the same type of arrangement that Pelikan entered into in 2021 when selling its logistics center in Falkensee, Germany.

A sale-leaseback occurs when a company sells an asset and then leases that same asset back from the purchaser. Typically, details such as lease payments and duration are worked out between the lessee (the seller of the asset) and the lessor (the purchaser of the asset) immediately after the sale. Leases tend to be long term, allowing a business owner to continue to use a vital asset without actually owning it. Such arrangements are common in the building and transportation industries as well as the real estate and aerospace sectors, entities that have high-cost fixed assets like property, land, or large expensive equipment. A sale-leaseback allows the lessor to easily acquire a ready-made, long-term tenant. The lessee benefits by divesting themselves of the burdens that come with property ownership and their balance sheet gets a healthy boost. This scenario allows a company to free up cash that was otherwise invested in an asset and put it to use for other purposes while still having access to the asset necessary for the business to operate. In this manner, capital can be raised without taking out a loan and incurring debt or issuing stock. The liability on a company’s balance sheet goes down by avoiding debt and increasing assets in the form of cash and the lease agreement. There are tax benefits as well since rental payments are often tax deductible. There are some drawbacks, however. A property might appreciate in value over time, causing the lessee to lose out on that appreciation. There is also a chance that market rents could fall below the negotiated monthly lease payment but those are relatively small downsides in the bigger picture of corporate finance.

There are a lot of details that still need to come to light but the proposed arrangement has the potential to modernize Pelikan’s facilities while simultaneously freeing up capital and improving the company’s balance sheet. How much of a disruption in production would be incurred during this turnover is unclear. Also, there are regulatory hurdles that need to be successfully negotiated prior to any deal moving forwards. Then there is the citizenry of Peine who previously raised concerns about the increased truck traffic that this might bring to the Pelikanstraße. Provided Pelikan and Hillwood can safely navigate all of these issues, it would likely be sometime before any construction project is completed. Still, this has significant potential upside for Pelikan so hopefully we’ll see smart business decisions that will allow the company to thrive for the foreseeable future. As always, I will continue to follow the story and bring you substantial updates as they become available.

References

• Tiemann, Jan. “Peine: Schreibwarenhersteller Pelikan plant offenbar neues Werk in Vöhrum.” Peiner Allgemeine. February 24, 2023.