38  ACQUISITIONS

  38.1  Effective 1 September 2020, Barloworld Mongolia Limited, an indirect wholly-owned subsidiary of Barloworld Limited, was awarded the Caterpillar distribution rights for Mongolia and acquired 100% of Wagner Asia Equipment LLC and a 49% share in SGMS LLC.  
 

Our Caterpillar business in Mongolia is engaged in the business of selling and distributing construction and mining equipment, aftermarket and technology solutions as well as rental solutions under the Caterpillar brand. This will enhance the expansion of the Barloworld Group in the mineral rich Eurasia region.

The goodwill, intangible and tangible asset values represented are provisional, as this acquisition was completed close to the group’s reporting date.

  1 September 2020 
  Rm  $m 
Initial provisional settlement  2 822  168.1 
Premium of US$45 million  755  45.0 
Estimated fair value of net assets (NAV) 428  25.5 
Trade payables owed to Sellers  1 136  67.8 
Escrow account – covering balance of trade payables owed to sellers  502  29.8 
   
Contingent deferred consideration  151  9.0 
Fair value of true-up payment amount*  67  4.0 
Fair value of the earn-out payment^  84  5.0 
   
Cash flow hedge reserve#  65  3.9 
  3 039  181.0 

The transaction is subject to the acquisition of 49% of ordinary shares in SGMS LLC as well as 80% of preference share in SGMS, which together effectively gives Barloworld 90% economic interest in and control of SGMS because the preference share in SGMS have the same rights as the ordinary shares, resulting in a non-controlling interest (NCI) to the extent of 10%. The purchase of SGMS is negligible/immaterial to the whole transaction and therefore they are not split for business combination accounting purposes. NCI is measured by applying the percentage holding of the NCI to the net asset value acquired.

*  The consideration transferred (the “Price” per sales purchase agreement) is made up of upfront payment of R2.8 billion ($168.1 million) as set out above, which per the sales purchase agreement (SPA), was paid on 1 September 2020, the effective date of the transaction. This settlement was paid from excess cash resources. A contingent consideration of R151.1 million ($9 million) was raised, arising from an earn-out per clause 2.1 in a third SPA amendment as well as further provisional true-up adjustments to the initial net asset value.  
^  The earn-out per schedule 21 clause 11(c) is considered to be an upward adjustment of the amount of the price for all purposes under the SPA, therefore, a liability is created and included in the consideration transferred as a contingent deferred consideration. The contingent deferred consideration was measured at fair value on 1 September 2020 and is subsequently remeasured based on revenue targets from 1 October 2020 to 30 September 2024 with changes to be recognised in profit or loss and included in headline earnings.

The minimum and maximum amount payable for the settlement of the contingent deferred earn-out consideration are US$nil and US$30 million respectively. 
#  The purchase consideration is settled in USD whereas the functional and presentation currency of the acquirer is Pound Sterling (GBP). This exposed the acquirer to foreign exchange risk that was hedged using existing USD denominated cash deposit (hedging instrument) designated from 17 March 2020 to 30 June 2020 as a cash flow hedge where the cash flow reserve is applied to the cost of the investment (hedged item) per the group policy as a basis adjustment. The hedge was fully effective as the same amount of USD was used to hedge the same amount of the purchase consideration. Therefore, the cash flow reserve of R65 million up to 30 June 2020 was added to the purchase consideration.  

Acquisition-related costs to the value of R44 million (£2.2 million) were incurred, excluded from consideration transferred and recognised as an expense in profit or loss.

There is no specific provision in the tax law regarding the deductibility of goodwill.

Identifiable assets and liabilities acquired on 1 September 2020

  Rm 
Non-current assets  1 324  
Property plant and equipment  543  
Supplier relationship^  773  
Intangible assets  8  
Current assets  1 857  
Trade and other receivables**  377  
Inventory  1 318  
Cash and cash equivalents  162  
Total assets  3 181  
Non-current liabilities  204  
Provisions  11  
Deferred tax  193  
Current liabilities  259  
Trade and other payables  259  
Total liabilities  463  
Net asset  2 718  
Property, plant and equipment is made up as follows: 
Land and buildings  249  
Plant and equipment  95  
Rental assets  174  
Vehicles and aircraft  25  
543  

Supplier relationships^

Intangible asset comprise of the Supplier relationship with Caterpillar representing the distribution rights for Mongolia. This will be amortised over the remaining useful life of 20 years. This is the only intangible asset which meets the IFRS recognition criteria.

Trade and other receivables**

The receivables acquired (which primarily comprised trade receivables) in this transaction with a fair value of R377 million had a gross contractual amounts of R673 million. The best estimate at acquisition date of the contractual cash flows not expected to be collected are R296 million.

  Rm 
Excess of consideration transferred over net asset acquired 
Consideration transferred  3 038  
Non-controlling interest  8  
Less: Value of identifiable assets and liabilities  (2 718)
Goodwill  328  
Net cash flows on acquisition of Wagner 
Consideration paid in cash  2 822  
Less: cash and cash equivalents acquired  (162)
2 660  

Goodwill represents synergies whereby Barloworld expects to leverage core competencies within its existing businesses in Russia which will create additional value.

The goodwill will be accounted for in terms of the group policy where it will be tested for impairment annually with impairment losses recognised in profit or loss but excluded from headline earnings.

  Rm 
Impact of acquisition on the results of the group post acquisition, 1 September 2020   
Revenue  190  
Operating profit  4  
Impact of acquisition on the results of the group since 1 October 2019 
Revenue  2 088  
Operating profit  150  

  38.2  Barloworld Limited (”Barloworld”) entered into a Sale and Purchase Agreement (“SPA”) with Tongaat Hulett Limited (”THS”) on 28 February 2020 to acquire 100% ownership interest in Tongaat Hulett Starch Proprietary Limited (“Ingrain”). The transaction was completed on 31 October 2020, being the transaction effective date. This purchase is done through Barloworld’s wholly owned subsidiary, KLL Group (Proprietary) Limited, which will hold the shares in Ingrain.

Ingrain is Africa’s largest producer of Starch, Glucose and related products, and produces a wide range of high quality products for customers across Africa and around the World using maize as raw material.

Barloworld acquired Ingrain, being a different business to its existing business portfolio, to balance out the seasonality of its existing business to deliver a consistent return to shareholder. 
 
  30 September
2020 
  Rm 
Consideration transferred1   
Initial price  4 536 
Cash price  4 536 
Contingent consideration2  450 
  4 986 
1  The consideration transferred (the "Purchase Consideration" per SPA) is made up of the initial amount of R4.536 billion, payable at the effective date in cash, and the adjustment payment payable when the closing stock take has been completed after the closing date. The adjustment payment is a contingent consideration in nature as it adjusts the purchase consideration up or down and is dealt with below. 
  Acquisition-related costs to the value of R53 million were incurred, excluded from consideration transferred and recognised as an expense in profit or loss.  
2  The contingent consideration of R450 million arises from the adjustment payment which will adjust the purchase consideration when finalised based on stock valuations. This has been added as one of the pre-closing activities, being a closing stock take as well as valuation thereof, and is not completed at closing date. This may result in either party having to pay another the difference between the initial amount paid on the closing/effective date of the transaction and the confirmed purchase consideration due to finalised stock take. It is expected that the stock take should be completed just after the closing date, within 15 business days after the closing date. The R450 million was arrived at using an estimate of the September 2020 working capital carrying values.

The contingent consideration was measured at fair value on 31 October 2020 based on the current stock values and will be subsequently remeasured at fair value based on the finalised stock values. Due to the short turnaround of the valuation since the closing date to finalisation of the stock count and valuation, the fair value of the contingent consideration approximate the amount of the purchase consideration agreed if the value of the stock is confirmed if their current recorded values. This is a measurement period adjustment, the business combination accounting is incomplete, and the amounts reported on 31 October 2020 being provisional.

When the stock values are finalised, the business accounting combination accounting on 31 October 2020 will be adjusted retrospectively to reflect the new information obtained about the facts and circumstances that existed as of 31 October 2020. The adjustments to the purchase consideration as a result of changes in the value of the contingent consideration, will be accounted for against goodwill. The range of possible outcomes is not expected to be materially different from the R450 million.

There is no minimum and maximum for the adjustment payment amount. 
Assets acquired and liabilities assumed on 30 September 2020
  30 September
2020 
  Rm 
Non-current assets  2 205 
Carrying amount of property plant and equipment3  709 
Fair value of land and buildings4  366 
Fair value carrying amounts of right-of-use assets  21 
Carrying amount of other intangible assets  38 
Fair value of intangible assets5  1 071 
Current assets  1 616 
Carrying amount of trade and other receivables6  709 
Derivative financial instruments  15 
Carrying amount of inventory  878 
Current tax  14 
Total assets  3 821 
   
Non-current liabilities  191 
Carrying amount of provisions  8 
Carrying amount of right-of-use liability  17 
Deferred tax  166 
Current liabilities  1 180 
Carrying amount of trade and other payables  455 
Carrying amount of right-of-use liability  6 
Carrying amount of borrowings  715 
Current tax  4 
Total liabilities  1 371 
Net asset  2 450 
   
3 Property, plant and equipment is made up as follows:   
Transport and vehicles  1 
Plant and machinery  632 
Office equipment  1 
Other fixed assets   36 
Capital work in progress  39 
  709 
   
4 Land and buildings comprises the following properties hosting the Mills:   
Bellville Mill  88 
Germiston Mill  72 
Kliprivier Mill  64 
Meyerton Mill  142 
  366 
   
5 Intangible assets   
Intangible asset comprises customer relationships may arise from non-contractual customer relationships, which represent loyal customers that will continue their relationship after the acquisition by a market participant. This is the only intangible asset, which meets the IFRS recognition criteria.   
   
6 The receivables acquired (which primarily comprised trade receivables) in this transaction with a carrying value of R709 million had a gross contractual amounts of R713 million. The best estimate at acquisition date of the contractual cash flows not expected to be collected are R4 million. The fair value of the receivables is still to be determined and finalised during the measurement period.   
   
Excess of consideration transferred over net asset acquired   
Consideration transferred  4 986 
Less: Fair value of identifiable assets and liabilities  (2 450)
Goodwill7  2 536 
   
Net cash flows on acquisition   4 986 
Consideration paid in cash  4 986 
7  Goodwill represents synergies/improvements whereby Barloworld expects that through product development and specialisation (into modified starches) it will be able to create immediate margin uplift and optimise the product mix, whilst the ability to leverage Barloworld’s core competencies in distribution within its existing businesses will create additional value. Goodwill will be accounted for in terms of the group policy where it will be tested for impairment annually with impairment losses recognised in profit or loss but excluded from headline earnings. Goodwill is not tax deductible.  

It should be noted that the values used for the business combination accounting above are as at 30 September 2020 because the purchase price allocation is not yet completed as at 31 October 2020 as some assets and liabilities still need to be fair valued. This has not been completed because the acquisition date is very close to the date the group financial statements are issued. When the business combination accounting is completed, which should be done by 30 October 2021 per IFRS 3 measurement period, the values allocated to assets and liabilities would be updated with any resulting adjustments accounted for against goodwill.