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 Guipúzkoa, 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 group’s 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 group’s 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:

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.

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 CGU’s 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.

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.