2019 
R’000 
  2018 
R’000 
 
8. ACQUISITIONS, DISPOSALS AND GOODWILL        
8.1 Acquisitions        
   Property, plant and equipment  (88 547)    (301 443)   
   Intangible assets  (10)    (26 283)   
   Deferred taxation  37 820     3 914    
   Interest in associates  (4 244)    (7 302)   
   Investments and advances  (51)    (4 548)   
   Inventories  (47 607)    (328 740)   
   Trade and other receivables  (58 249)    (317 441)   
   Cash and cash equivalents  (88 446)    25 071    
   Borrowings  7 801     271 219    
   Trade and other payables and provisions  70 603     383 102    
   Taxation  7 179     (1 263)   
   Total identifiable net assets at fair value  (163 751)    (303 714)   
   Separately identifiable intangible assets  (192 672)    –    
   Non-controlling interest  3 950     12 283    
   Goodwill  (365 948)    (1 142 558)   
   Gain from bargain purchase  –     4 222    
   Total value of acquisitions  (718 421)    (1 429 767)   
   Cash and cash equivalents acquired  88 446     (25 071)   
   Vendors for acquisition recognised  138 557     278 576    
   Puttable non-controlling interest liabilities recognised  70 464     246 192    
   Costs incurred in respect of acquisitions  (27 686)    (35 541)   
   Net amounts paid  (448 640)    (965 611)   
 

The group made a number of acquisitions during the year, namely: The Punjab Kitchen Limited (renamed Simply Food Solutions) (United Kingdom) a market leading manufacturer of texture modified meals and specialist ready meals, supplying primarily into the United Kingdom NHS and healthcare sector; Igartza, S.L. (Spain) a broadline foodservice distributor located in Guipķzkoa, northern Spain; and in-territory bolt-on acquisitions of KBC Foods (Australia), Six Bar Trading 409 CC (South Africa) and Foodchoice (Chile).

Qualitative factors that support (but, not limited to) the goodwill recognised during the year:

  • Gaining access to new geographies (Guipúzkoa, northern Spain);
  • Improving purchasing power for the group; and,
  • Management’s skill and expertise as a platform from which to consolidate their respective fragmented foodservice markets.

These acquisitions form part of the groupís strategic expansion plans in the international foodservice industry. Goodwill arose on the acquisitions as the anticipated value of future cash flows that were taken into account in determining the purchase consideration exceeded the net assets or net liabilities acquired at fair value and separately identifiable intangible assets (refer note 7.2). The acquisitions have enabled the group to expand its range of complementary products and services and, as a consequence, has broadened the groupís base in the market place. There were no significant contingent liabilities identified in the businesses acquired.

The impact of these acquisitions on the group’s results can be summarised as follows:

  Punjab 
Kitchen 
R’000 
Igartza, 
S.L. 
R’000 
Other 
smaller 
acquisitions 
R’000 
  Total 
R’000 
 
Property, plant equipment  48 093  34 113  6 341     88 547    
Intangible assets  –  10  –     10    
Deferred taxation  (37 510) (310) –     (37 820)   
Interest in associates  –  4 244  –     4 244    
Investments and advances  –  51  –     51    
Inventories  11 366  19 901  16 340     47 607    
Trade and other receivables  24 712  27 877  5 660     58 249    
Cash and cash equivalents  80 630  7 816  –     88 446    
Borrowings  –  (7 801) –     (7 801)   
Trade and other payables  (10 294) (43 861) (16 448)    (70 603)   
Taxation  (7 179) –  –     (7 179)   
Total identifiable net assets at fair value  109 818  42 040  11 893     163 751    
Separately identifiable intangible assets  192 672  –  –     192 672    
Goodwill  216 538  113 159  36 251     365 948    
Non-controlling interest  –  –  (3 950)    (3 950)   
Total value of acquisition(s) 519 028  155 199  44 194     718 421    
Cash and cash equivalents acquired  (80 630) (7 816) –     (88 446)   
Vendors for acquisition recognised  (79 673) (34 615) (24 269)    (138 557)   
Puttable non-controlling interest liabilities recognised  (70 464) –  –     (70 464)   
Costs incurred in respect of acquisitions  4 186  3 192  20 308     27 686    
Net amount(s) paid  292 447  115 960  40 233     448 640    
Date acquired  January 1 2019  July 17 2018  Various          
Contribution to results for the year                   
Revenue  96 945  225 456  195 058     517 459    
Trading profit (loss) 18 626  13 928  (3 614)    28 940    
Contributions to results for the year if the acquisitions had been effective on July 1 2018                   
Revenue  183 497  245 952  233 422     662 871    
Trading profit (loss) 36 699  15 194  (3 230)    48 663    

The purchase price allocations for Punjab Kitchen and Igartza, S.L. are provisional and may be retrospectively adjusted if the group obtains new information about facts and circumstances that existed at the acquisition date relating to these entities.

Vendors for acquisition recognised on acquisition relates to contingent consideration. These contingent consideration payments are separately recognised on acquisition as a financial liability at fair value. Vendors for acquisition is a contractual provision in an acquisition agreement that adds a variable component to the purchase price. This allows for a portion of the purchase price to be paid to the former owners on a contingent basis if and to the extent that the target business reaches certain milestones in the period post being acquired. Often these milestones are financial in nature (achieving, for example, revenue, net income or EBITDA benchmarks). Contingent consideration liabilities are linked to the future performance targets of the respective company (and not to changes in ownership) whereas puttable NCI liabilities recognised on acquisition are related to future changes in ownership (ie changes in shareholding). Refer note 10.4 for further details.

     2019 
R’000 
  2018 
R’000 
 
8.2 Disposal of subsidiaries        
   Proceeds on disposal of interest in subsidiary:        
   Investments and advances       16 946    
   Trade and other receivables       9 050    
   Total identifiable net assets at fair value       25 996    
   Loss on disposal of interest in subsidiary       (9 050)   
   Net proceeds       16 946    
8.3 Goodwill        
  Carrying value at beginning of year  14 539 284     12 791 153    
   Acquisition of businesses  365 948     1 142 558    
   Impairment of goodwill  –     (200 216)   
   Exchange rate adjustments  (121 078)    805 789    
   Carrying value at end of year  14 784 154     14 539 284    
   The carrying value of goodwill was allocated to cash-generating units as follows:         
  Australasia    2 853 081       2 900 850   
   United Kingdom  2 860 404     2 681 221    
   Europe  7 836 447     7 694 720    
   Emerging Markets  1 234 222     1 262 493    
      14 784 154     14 539 284    
 

Goodwill acquired through business combinations is allocated for impairment testing purposes to cash-generating units (CGU) which reflect how it is monitored for internal management purposes, namely the various CGUs of the Group. The carrying amount of goodwill was subject to an annual impairment test, the recoverable amount was determined by using the discounted cash flow for each CGU.

The critical underlying assumptions applied (ie discount rate, cash flow growth, and terminal growth rate) were reviewed by management and compared with the CGU’s budget and the current macro-economic environment.

Management considered the sensitivities underlying the primary assumptions to determine the consequences that reasonably possible changes in such assumptions may have on the recoverable amount of the underlying assets.

During the year, no goodwill impairments were identified (2018: goodwill impairments of £8,2 million (R142,1 million) relating to PCL Transport 24/7 Limited (United Kingdom segment), and BRL15 million (R58,0 million) relating to the Brazil CGU (Emerging Markets segment) were recorded against goodwill).

Key assumptions

The key assumptions applied in the value-in-use calculations are:

  • cash flow forecasts which are derived from budgets most recently approved by the boards covering the next five-year period;
  • sales volumes, sales prices and variable input cost assumptions in the budget are derived from a combination of economic forecasts for the regions in which the group operates, industry forecasts for individual product lines, internal management projections, and historical performance;
  • cash flow projections beyond five-year period are based on internal management projections taking into consideration industry forecasts and growth rates in the regions in which the group operates.
  • capital expenditure forecasts are based on historical experience and include expenditure necessary to maintain the projected cash flows from operations at current operating levels.
  • The discount rates are determined using the CGUís country risk, market risk and company specific risk premiums. Factors considered (but not limited to) are as follows: financial risk of the CGU (ie level of debt); forecasted profitability of the CGU (including forecasting risk); operational risk of the company (ie operating leverage/margins of the business, mix of fixed and variable components); customer and supplier concentration of the CGU.

The table illustrates the discount rate, cash flow growth and terminal growth rates that were used in the discounted cash flow valuations for each of the CGUs.

  2019    2018   
  Discount rate   
Australasia 6,0 – 6,2%   6,2 – 7,0%   
United Kingdom 6,2 – 6,5%   6,0 – 12,0%  
Europe* 5,0 – 9,0%   5,0 – 9,0%  
Emerging Markets** 7,0 – 27,0%   7,5 – 19,9%  
  Cash flow growth rate  
Australasia 5,3 – 5,7%   3,0 – 7,0%  
United Kingdom 3,0 – 4,6%   3,0 – 5,0%  
Europe* 1,0 – 10,9%   2,0 – 12,0%  
Emerging Markets** 4,6 – 16,9%   2,0 – 15,0%  
  Terminal growth rate  
Australasia 1,0%   1,5%  
United Kingdom 1,0 – 1,5%   1,0 – 1,5%  
Europe 1,0 – 2,0%   1,0 – 2,0%  
Emerging Markets 1,5 – 2,0%   2,0 – 2,5%  
* The Europe CGU comprises a number of countries which each present different expected growth and discount rates. Czech Republic and Slovakia, Poland, and The Baltics are all Eastern European countries (but part of the European Union) which generally have higher discount and expected growth rates compared to Belgium, Netherlands, Germany, Portugal, Spain and Italy which are Western European countries and typically have lower discount and expected growth rates. In addition, our European businesses are at varying levels of maturity in terms of their business cycle (development) which impacts the expected growth and discount rates applied.
** The increase in upper end of the range for Emerging Markets relates to Turkey which has been impacted by the Turkish macro-economic environment.

Sensitivity analyses

Expected future cash flows are inherently uncertain and could change materially over time. They are affected by a number of factors, including market estimates, together with economic factors such as prices, growth rates, discount rates, currency exchange rates, and future capital expenditure.

Sensitivity analyses of reasonably possible changes in the underlying assumptions for each group of CGUs included:

  • 1% increase in the discount rates for all CGUs;
  • 1% decrease in the average cash flow growth rates for all CGUs.

Using the above sensitivity analyses, a quantitative impairment indicator was raised for the goodwill associated with the Iberian and Germany CGUs. Qualitatively, these operations are in the process of improving their operational platforms to become broadline foodservice distributors with scale and opportunities to generate positive economic returns. Measures in place to improve the operations include (but not limited to):

  • significant infrastructure spend to grow capacity and scale (new warehouse being built in Munich and geographic expansion into northern Spain through the acquisition of Igartza);
  • change in sales mix towards the independent sector (growth prospects related to independent customers);
  • expansion of their foodservice offering through product diversification;
  • improvements to information technology systems and e-commerce development; and
  • investment in human capital.

The goodwill attributable to the Iberian CGU at June 30 is R1,4 billion (2018: R1,3 billion). The assumptions applied in the value-in-use calculations at June 30 were as follows: discount rate of 7,0% (2018: 7,5%), cash flow growth rate of 4,7% (2018: 7,3%) and terminal growth rate of 2% (2018: 2,0%). An increase in the discount rate of 1% (14% change in assumption) would hypothetically result in a goodwill impairment of R187 million.

The goodwill attributable to the Germany CGU at June 30 is R284,5 million (2018: R288,2 million). The assumptions applied in the value-in-use calculations at June 30 were as follows: discount rate of 5,5% (2018: 5,2%), cash flow growth rate of 10,9% (2018: 6%) and terminal growth rate of 2% (2018: 1,5%). An increase in the discount rate of 1% (18% change in assumption) would hypothetically result in a goodwill impairment of R243 million.

With the exception of the Germany and Iberian CGUs, none of these downside sensitivity analyses in isolation indicated the need for an impairment for other CGUs within the group. The valuation method is consistent with that used in the prior years and is considered a Level 3 type valuation in accordance with IFRS 13 Fair Value Measurement.