Business combinations during the period

Businesses acquired Nature of business Operating segment   Date acquired   Interest acquired %   Purchase consideration Rm  
Surgipharm Limited Markets and distributes pharmaceutical, medical, surgical and allied supplies in Kenya Logistics African Regions   July 2017   70   490  
Pentagon Motor Holdings Limited Headquartered in Derbyshire, England, operates 21 prime retail dealerships for numerous leading car and van manufacturers Vehicle Retail and Rental   August 2017   100   479  
SWT Group Proprietary Limited Based in Australia operates 16 car dealerships Vehicle Retail and Rental   September 2017   75   261  
                1 230  

Reasons for the acquisitions are outlined on Capital allocation.

FAIR VALUE OF ASSETS ACQUIRED AND LIABILITIES ASSUMED AT DATE OF ACQUISITION*
R million     Surgipharm     Pentagon     SWT     Total    
Assets                            
Intangible assets (excluding goodwill)    191     2           193    
Property, plant and equipment     33     357     26     416    
Deferred tax assets                 10     10    
Inventories     234     775     256     1 265    
Trade and other receivables     280     423     48     751    
Current tax assets     22     10           32    
Cash resources     12     74     23     109    
      772     1 641     363     2 776    
Liabilities                            
Deferred tax liabilities     37     4           41    
Interest-bearing borrowings     82     69     240     391    
Other financial liabilities     198                 198    
Trade and other payables and provisions     249     1 253     50     1 552    
Current tax liabilities                 8     8    
      566     1 326     298     2 190    
Acquirees' carrying amount at acquisition     206     315     65     586    
Non-controlling interests     (62)    (21)    (16)    (99)   
Net assets acquired     144     294     49     487    
Purchase consideration transferred     490     479     261     1 230    
Cash paid     398     479     261     1 138    
Contingent consideration     92                 92    
Excess of purchase price over net assets acquired     346     185     212     743    
* The initial accounting for the business combinations is incomplete and based on provisional figures. 
 

DETAILS OF CONTINGENT CONSIDERATION

The contingent consideration requires the group to pay the vendors an additional total amount of R92 million over a period of eighteen months if Surgipharm’s net profit after tax exceeds certain profit targets.

ACQUISITION COSTS

Acquisition costs for business acquisitions concluded during the period amounted to R7 million and have been recognised as an expense in profit or loss in the ‘Other non-operating items’ line.

IMPACT OF THE ACQUISITION ON THE RESULTS OF THE GROUP

From the dates of acquisition the businesses acquired during the period contributed revenue of R4 581 million, operating profit of R59 million and after tax profit of R1 million. The after tax profit of R1 million includes the after tax impact of the funding cost of R11 million calculated on the cash consideration paid on acquisitions and the amortisation of intangible assets arising out of the business combinations of R17 million.

Had all the acquisitions been consolidated from 1 July 2017, they would have contributed revenue of R6 357 million, operating profit of R22 million and after tax loss of R32 million. The group’s total revenue for the period would have been R68 296 million, operating profit would have been R3 056 million and after tax profit R1 336 million.

SEPARATE IDENTIFIABLE INTANGIBLE ASSETS

As at the acquisition date the fair value of the separate identifiable intangible assets for Surgipharm was R191 million. This fair value, which is classified as level 3 in the fair value hierarchy, was determined using the multi-period excess earnings method (MEEM) valuation technique for contract based intangible assets and the relief-from-royalty method for the brand name.

The significant unobservable valuation inputs were as follows:

    %  
Brand name      
– Discount rate   17,4  
– Royalty rate   0,75  
Contract-based intangible assets      
– Weighted average discount rates   15,0 - 15,8  
– Terminal growth rate   5,6  

The assumptions used in arriving at projected cash flows were based on past experience and adjusted for any expected changes.

OTHER DETAILS

Trade and other receivables had gross contractual amounts of R825 million of which R74 million was doubtful. Non-controlling interests have been calculated based on their proportionate share in the acquiree’s net assets. None of the goodwill is deductible for tax purposes.