A. O. Smith has found its way out of China, or most of the way. The Milwaukee water heater and boiler maker said late on October 27 that CPE, an alternative asset manager, will buy 81% of A. O. Smith (China) Investment Co., the holding company for its Chinese operations. A. O. Smith keeps 19%, licenses its brand to the new owner for decades, and collects royalties along the way. Closing is expected in the first half of 2027, pending regulatory approval.
The headline figure is a valuation of about $400 million, cash-free and debt-free. The company also says the total value “is expected to exceed $500 million” once you add the net present value of those licensing payments. That second number is the one the release wants you to remember. It’s also the softer one.
Here’s the context the release skips. China was about 18% of A. O. Smith’s 2025 net sales of $3.83 billion, which puts the business somewhere near $690 million in annual revenue. So a $400 million enterprise value is roughly 0.6 times sales. For a business that carried the company’s growth story in China for most of two decades, that’s a modest price.
Why the price is low
The filings explain it plainly. Third-party sales in China fell 12% in local currency in 2025, and the slide got worse in the second half once government appliance subsidies ran out. Management guided for another mid-single-digit decline in 2026. Then the second quarter came in far worse: China sales dropped 28% in local currency, and the Rest of World segment (China plus India and some smaller markets) saw earnings fall from $25.3 million to $10.2 million, with margin cut from 10.5% to 5.2%.
A buyer looking at that trend isn’t paying for the past. CPE is paying for a shrinking business with about 4,200 employees, which was roughly a third of A. O. Smith’s entire headcount at the end of 2025. A. O. Smith started its strategic review in the summer of 2025 and spent more than a year talking with “several potential partners.” That it landed on a financial buyer at this multiple tells you how much competition there was for the asset.
The $500 million figure
The gap between $400 million and “more than $500 million” is the royalty stream, discounted back to today. The release gives no royalty rate, no term in years beyond “multi-decade,” and no discount rate. Without those, a reader can’t test the number at all. A royalty is only as good as the licensee’s sales, and the licensee’s sales are the same ones that just fell 28% in a quarter. If the Chinese market keeps contracting, the present value shrinks with it.
There’s a reasonable case for the structure. Keeping the brand in China, with a local owner running it, protects the name’s value for a possible return later and keeps a little upside through the 19% stake. But the 19% has its own problem: a minority holding in a private company controlled by an asset manager is hard to value and harder to sell. Treat it as an option, not cash.
The cash that is real comes in two parts. The 81% stake at a $400 million valuation works out to something like $324 million before tax and adjustments. On top of that, the company plans to bring home about $80 million currently held in China. The 2025 annual report showed roughly $140 million of cash and securities held by foreign subsidiaries, nearly all of it in China, so a good chunk has already come out or been spent since then.
Where the money goes
A. O. Smith says it will “prioritize share repurchases” with the after-tax proceeds and the repatriated cash. That fits the pattern. The company bought back about $401 million of stock in 2025 and raised its 2026 buyback target to $300 million in July. Adding several hundred million more after closing makes the capital return story bigger, and it’s probably the main reason the stock market will like this deal.
It’s worth being clear about what buybacks do here. They lift earnings per share by shrinking the share count. They don’t replace the revenue that leaves with China. After closing, A. O. Smith becomes a mostly North American company with an India business attached, plus Lochinvar boilers and water treatment. Reported sales will drop by several hundred million dollars a year. The company hasn’t said how its guidance will change; it reports third-quarter results on October 29 and the call should be where those numbers appear.
Things the release doesn’t say, which shareholders should ask about on that call:
- The expected accounting loss or gain on sale, and whether the business will now be reported as held for sale or discontinued operations.
- Tax leakage on the proceeds and on repatriation.
- The royalty rate and how it’s calculated, whether on sales or a fixed fee.
- What happens to supply arrangements, since some products and components may have flowed between the Chinese plants and other markets.
The deal is a sensible exit from a market that turned against the company. A western industrial seller taking well under a year’s revenue for a Chinese unit isn’t unusual anymore; plenty have done the same as local competitors took share and consumer demand sagged. The release dresses it up with the bigger total-value figure. The smaller figure, $400 million for a business that sold close to $700 million last year, is the honest one.
For more of our reading on what releases say and what they don’t, see why press releases need evidence beyond a strong headline.