DS Smith Plc – Half year report – 31 October 2017
Industry: Manufacturing
- Acquisitions and disposals (extract 1)
(a) Acquisition of Interstate Resources
On 29 June 2017, the Group entered into a conditional agreement to acquire an 80% interest in Indevco Management Resources Inc. (IMRI), the owner of Interstate Resources Inc. (Interstate Resources), from Merpas Co. Sàrl. (‘Merpas’), which completed on 25 August 2017.
Interstate Resources is an integrated packaging and paper producer based on the East Coast of the USA. It operates from 19 production sites and has approximately 1,500 employees.
Interstate Resources operates across the entire packaging chain including wood procurement, paper manufacturing, design, packaging manufacturing and customer logistics, with the majority of their customer base for its packaging products being FMCG and food customers.
The acquisition aligns with the global convergence of DS Smith’s customers’ requirements and is expected to create a higher quality, higher margin group with more growth potential.
The acquisition was funded by the issue of a placing on 29 June 2017 of shares in the Company with proceeds net of commissions and expenses of £280m, existing debt facilities, new debt facilities of £400m agreed by the Company on 28 June 2017, and the issue of 52,474,156 ordinary shares to the seller.
In the half year ended 31 October 2017, Interstate Resources contributed combined revenue of £110m and operating profit before amortisation and adjusting items of £15m to the Group’s results. If the acquisition had occurred on 1 May 2017, estimated revenue and operating profit before amortisation and adjusting items for the combined entity would have been £2,989m and £278m respectively.
The following table summarises the consideration paid for the Interstate Resources business and provisional fair value of assets acquired and liabilities assumed:
The fair value of the ordinary shares issued was based on the listed share price of the Company at 25 August 2017 of £4.97 per share.
A detailed exercise has been undertaken to assess the provisional fair values of assets acquired and liabilities assumed, with the use of third party experts where appropriate. The provisional fair values of intangible assets and property, plant and equipment has been assessed by reference to work performed by an independent valuation specialist. The intangible assets acquired as part of the acquisition relate to customer relationships.
If new information obtained within one year from the acquisition date about facts and circumstances that existed at the acquisition date identifies adjustments to the above amounts, or any additional provisions that existed at the acquisition date, then the acquisition accounting will be revised.
The redemption liability relating to non-controlling interest of £152m relates to the 20% minority stake in IMRI retained by Merpas. On fixed dates over the next four years, Merpas can require the Group to acquire some or all of the remaining shares in IMRI on agreed terms under a put option, and, on the fifth anniversary of Completion, the Group will (unless agreed otherwise) acquire any shares in IMRI that it does not already own. The Group has concluded that the risks and rewards related to the put option have substantially transferred to the Group as acquirer and, as such, a financial liability has been recognised, with no non-controlling interest recognised in the statement of financial position. The redemption liability is held at discounted fair value, with subsequent movements to be taken to the income statement; movements due to re-measurement using the multiple based formula as specified in the contract will be recorded in operating profit in adjusting items; the unwind of the discount will to be taken to finance cost adjusting items. The redemption liability is included in trade and other payables in the Consolidated Statement of Financial Position.
Deferred tax is recognised on the temporary timing differences created by the fair value adjustments.
The trade and other receivables comprise gross contractual amounts due of £63m. At the acquisition date, it is estimated that contractual cash flows of £1m will not be collected.
The provisional goodwill balance of £588m arising on the acquisition of Interstate Resources (which is not expected to be tax deductible) includes anticipated synergies from integrating Interstate Resources into the Group, and the skills and technical talent of the Interstate Resources workforce.
- Acquisitions and disposals (extract 2)
(d) Acquisition related costs
The Group incurred acquisition related costs in the half year ended 31 October 2017 of £18m (half year ended 31 October 2016: £3m; year ended 30 April 2017: £7m), which primarily related to the acquisition of Interstate Resources as detailed in 13(a). In addition to the total of £18m which was included in administrative expenses within adjusting items, £5m of costs related to the share placing with existing DS Smith equity holders have been netted against share premium.
Accounts examples 