NOTES

Forming part of the financial statements

 

11. BUSINESS COMBINATIONS

Vermont Hard Cider Company LLC

The Group completed the acquisition of the Vermont Hard Cider Company, LLC (VHCC) in the United States for a consideration of €230.9m ($305.0m). The transaction was completed on 21 December 2012.

VHCC owns and operates the trademarks for the Vermont portfolio of brands including the Woodchuck and Wyder’s cider brands. It also owns a 400,000 hectolitre cidery and warehouse facilities in Vermont and a new freehold site on which the Group plans to expand the cidery and to build a visitor centre. After the transaction completed, a total of 1,422,099 ordinary shares were issued, at fair value, to two former stakeholders and existing members of the VHCC management team for a consideration of €5.3m ($7.0m).

The assets and liabilities acquired as a result of this acquisition, together with the fair value adjustments made to those carrying values, were as follows:-

Initial fair Adjustment Revised
value to initial fair
assigned fair value value
€m €m €m
     

Property, plant & equipment

3.0 0.7 3.7

Brands & other intangible assets

1.2 157.8 159.0

Financial asset

0.2 (0.2) -

Inventories

2.8 - 2.8

Trade & other receivables – current

3.0 - 3.0

Cash and cash equivalents

3.4 - 3.4

Trade & other payables

(2.6) - (2.6)

Deferred tax liability

- (0.2) (0.2)
   

Net identifiable assets and liabilities acquired

11.0 158.1 169.1

Goodwill arising on acquisition

64.6
   

233.7
   

Consideration transferred/transferable:

   

Cash consideration paid

    230.9

Working capital - initial payment

2.3

Working capital settlement accrued

0.5
   

Total consideration

233.7
   

Net cash outflow arising on acquisition

   

Cash consideration paid and working capital settlement paid

    233.2

Less: cash and cash equivalents acquired

(3.4)
   

Total

229.8

The working capital settlement of $3.7m (€2.8m at date of transaction) reflects an amount payable over and above the contractual purchase price reflecting ‘normalised working capital’ as set out in the purchase agreement.

All the goodwill arising on acquisition is tax deductible.

The Five Lamps Dublin Beer Company Limited

The Group also acquired a 92.5% equity holding in The Five Lamps Dublin Beer Company Limited, an Irish craft brewer. The initial investment, and the profit earned since acquisition were all less than €0.1m. The transaction was completed on 4 September 2012.

Acquisition costs

Acquisition costs of €3.3m, have been shown in exceptional operating costs in the Income Statement. These costs relate to the acquisition of VHCC in the US and the contractual arrangement to acquire M. & J. Gleeson (Investments) Limited and its subsidiaries, which had not completed at year-end (note 5).

The post-acquisition impact of acquisitions completed during the year on Group profit for the financial year was as follows:

2013
€m
 

Revenue

6.7

Excise duties

(0.3)

Net revenue

6.4

Operating costs

(4.6)

Operating profit

1.8

Income tax expense

-

Results from acquired businesses

1.8

The net revenue and operating profit of the Group for the financial year determined in accordance with IFRS as though the acquisitions effected during the year had been at the beginning of the year would have been as follows:

Pro Forma
2013
€m

Net revenue

512.9

Group operating profit for the financial year attributable to equity shareholders

118.3

12. PROPERTY, PLANT & EQUIPMENT
Motor
Freehold vehicles
land & Plant & & other
buildings machinery equipment Total
€m €m €m €m

Group

       

Cost or valuation

       

At 1 March 2011

75.1 156.1 79.8 311.0

Translation adjustment

0.6 0.9 1.0 2.5

Additions

0.2 6.2 12.2 18.6

Disposals

- (0.3) (0.9) (1.2)

Disposal of Northern Ireland wholesaling business

(0.8) - (1.1) (1.9)

Revaluation of property, plant & machinery

(2.8) (0.9) - (3.7)
       

At 29 February 2012

72.3 162.0 91.0 325.3
       

Translation adjustment

(1.9) (2.3) (2.3) (6.5)

Additions

2.1 8.0 14.2 24.3

Acquisition of business VHCC

- 3.7 - 3.7

At 28 February 2013

72.5 171.4 102.9 346.8
       

Depreciation

       

At 1 March 2011

6.4 73.4 44.0 123.8

Translation adjustment

- 0.2 0.6 0.8

Charge for the year

1.1 9.7 9.4 20.2

Disposals

- (0.1) (0.2) (0.3)

Disposal of Northern Ireland wholesaling business

- - (1.0) (1.0)
       

At 29 February 2012

7.5 83.2 52.8 143.5
       

Translation adjustment

(0.2) (0.5) (1.2) (1.9)

Charge for the year

1.2 10.7 9.7 21.6

At 28 February 2013

8.5 93.4 61.3 163.2

Net book value

At 28 February 2013

64.0 78.0 41.6 183.6

At 29 February 2012

64.8 78.8 38.2 181.8

No depreciation is charged on freehold land, which had a book value of €10.8m at 28 February 2013 (29 February 2012: €9.3m).

Valuation of freehold land, buildings and plant & machinery – 29 February 2012

During the year ended 29 February 2012, the Group engaged external valuers Ronan Diamond BSc (Hons) MSCSI MRICS and Brian Gilson, BSc (Surv) MSCSI MRICS MCI Arb - Lisney to value its freehold properties in ROI; David Fawcett, FRICS RICS Registered Valuer - Sanderson Weatherall to value its plant & machinery in ROI, and, Timothy Smith BSc MRICS RICS Registered Valuer and Joseph ML Funtek BSc MRICS RICS Registered Valuer - Gerald Eve to value both its freehold properties and plant & machinery in the UK as at 29 February 2012. The valuations were in accordance with the requirements of the RICS Valuation Standards, seventh edition and the International Valuation Standards.

The valuation of ROI property was on the basis of market value, defined as ‘the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms-length transaction, after proper marketing wherein the parties had acted knowledgeably, prudently and without compulsion’ and was subject to the assumption that the property be sold at its highest and best use value. IAS 16 Property, Plant and Equipment prescribes that where there is no market based evidence of Fair Value because of the specialist nature of the item of property, plant and equipment and the item is rarely sold, except as part of a continuing business, an entity may need to estimate Fair Value using an income or a Depreciated Replacement Cost approach to valuation. The valuer’s opinion of Fair Value of the ROI properties was primarily derived using comparable recent market transactions on an arm’s-length basis while the Fair Value of those in the UK was derived based on the Depreciated Replacement Cost approach to valuation in light of the lack of comparative recent market transactions.

In view of the specialised nature of the Group’s plant & machinery assets and the lack of comparable market evidence of similar plant being sold as a ‘going concern’, a Depreciated Replacement Cost approach was used to assess a Fair Value of the Group’s plant & machinery assets. This methodology takes a gross current replacement cost for each class of plant & machinery and applies a depreciation factor to reflect both physical and functional obsolescence. An economic obsolescence factor is then applied to the net current replacement cost. This factor takes into account the anticipated capacity utilisation of plant relative to total available production capacity. The significant additional assumptions applied in valuing the plant & machinery include useful lives and asset utilisations, the following useful lives were attributed to the assets:-


Asset category Useful life

Tanks

30 - 35 years

Process equipment

20 years

Bottling & packaging equipment

15 - 20 years

Process automation

10 years

Following the valuation exercise, the carrying value of land was reduced as outlined below and the resulting loss of €3.4m was debited directly to a revaluation reserve within equity (€3.0m) to the extent that it reduced a previously recognised gain and to the income statement (€0.4m) to the extent it arose on revaluation and there were no previously recognised gains in the revaluation reserve in respect of previous revaluations of that asset.

An increase in the carrying value of buildings in Glasgow of €1.3m was credited directly to a revaluation surplus reserve within equity while the reduction in the carrying value of buildings in Clonmel and Shepton Mallet of (€0.7m) was recognised directly in the income statement as there were no previously recognised gains in the revaluation reserve by which to offset. The carrying value of plant & machinery was reduced and the resulting loss of (€0.9m) was recognised in the income statement.

Plant &
Land Buildings machinery Total
€m €m €m €m

Carrying value at 29 February 2012 post revaluation

9.3 55.5 78.8 143.6

Carrying value at 29 February 2012 pre revaluation

12.7 54.9 79.7 147.3

(Loss)/gain on revaluation

(3.4) 0.6 (0.9) (3.7)
       

Classified within:

       

Income statement

(0.4) (0.7) (0.9) (2.0)

Other comprehensive income

(3.0) 1.3 - (1.7)
       

(Loss)/gain on revaluation

(3.4) 0.6 (0.9) (3.7)
       

Valuation of freehold land, buildings and plant & machinery – 29 February 2013

An internal valuation was completed as at 28 February 2013. The Directors considered fluctuations in the property market since the last external valuation was completed twelve months ago. The carrying value of all plant and machinery valued under the depreciated replacement method in the prior year was also reviewed. As part of this valuation the Directors considered projected asset utilisations, changes in useful lives and obsolescence. The current year valuations did not result in a material variation to the current value of property, plant & equipment and hence no adjustment was deemed necessary.

In the current financial year following the acquisition of VHCC the Group engaged external valuer, John Coto, Certified Machine & Equipment Appraiser, Alliance Machinery & Equipment Appraisals to value the plant & machinery acquired using the depreciated replacement cost method of valuation. This valuation increased the carrying value of plant & machinery acquired by $1.0m (€0.7m euro equivalent at date of acquisition).

Company

The Company has no property, plant & equipment.

13. GOODWILL & INTANGIBLE ASSETS
Other
intangible
Goodwill Brands assets Total
€m €m €m €m
       

Cost

       

At 1 March 2011

378.1 86.6 1.7 466.4

Translation adjustment

0.4 1.6 0.1 2.1

Acquisition of Hornsby’s cider brand

- 16.6 - 16.6
       

At 29 February 2012

378.5 104.8 1.8 485.1
       

Translation adjustment

(0.7) (2.1) (0.1) (2.9)

Acquisition of VHCC (note 11)

64.6 159.0 - 223.6

Acquisition of Waverley brands

- 1.3 - 1.3

Additional consideration re prior year acquisition of Hornsby’s cider brand

- 0.4 - 0.4
       

At 28 February 2013

442.4 263.4 1.7 707.5
       

Amortisation

       

At 1 March 2011

- - 0.1 0.1

Charge for the year

- - 0.1 0.1
       

At 29 February 2012

- - 0.2 0.2

Charge for the year

- - 0.1 0.1
       

At 28 February 2013

- - 0.3 0.3

Net book value

At 28 February 2013

442.4 263.4 1.4 707.2
       

At 29 February 2012

378.5 104.8 1.6 484.9

Goodwill

Goodwill has been attributed to reporting segments (as identified under IFRS 8 Operating Segments) as follows:-

Cider Tennent’s
ROI UK UK International Total
€m €m €m €m €m

Cost

         

At 1 March 2011

120.3 217.6 18.3 21.9 378.1

Translation adjustment

- 0.2 0.2 - 0.4

At 29 February 2012

120.3 217.8 18.5 21.9 378.5
         

Translation adjustment

- (0.5) (0.6) 0.4 (0.7)

Acquisition of VHCC

- - - 64.6 64.6
         

At 28 February 2013

120.3 217.3 17.9 86.9 442.4

Goodwill consists both of goodwill capitalised under Irish GAAP which at the transition date to IFRS was treated as deemed cost and goodwill that arose on the acquisition of businesses since that date which was capitalised at cost and represents the synergies arising from cost savings and the opportunity to utilise the extended distribution network of the Group to leverage the marketing of acquired products.

In line with IAS 36 Impairment of Assets, goodwill is allocated to each operating segment (which may comprise more than one cash generating unit) which is expected to benefit from the combinations synergies. These operating segments represent the lowest level within the Group at which goodwill is monitored for internal management purposes.

All goodwill is regarded as having an indefinite life and is not subject to amortisation under IFRS but is subject to an annual impairment assessment.

Brands

As detailed in note 11 the Group completed the acquisition of the Vermont Hard Cider Company, LLC on 21 December 2012, which included the acquisition of a portfolio of brands, including the Woodchuck and Wyder’s cider brands. The value attributed to the acquisition of this portfolio of brands was €159.0m.

Hornsby’s brand

On 8 November 2011, the Group completed the acquisition of the Hornsby’s cider brand from E & J Gallo Winery comprising the global intellectual property rights to the Hornsby’s brand, which did not constitute a business combination under IFRS 3 (2008) Business Combinations. In addition, the Group acquired inventory valued at €1.7m. The Group entered into a Transitional Services Arrangement with E & J Gallo Winery for the production and distribution of the brand for a period of one year and for the provision of all sales, commercial, accounting and back office services for a period of seven months.

The transaction was completed for an initial cash consideration of €16.4m ($22.5m). Costs totalling €0.2m were incurred in acquiring the brand. In addition, contingent consideration of up to €3.6m (US$5.0m) was payable subject to the performance of the brand during a transitional period. In the prior year this was assumed by the Directors to amount to a payable of $2.4m (€1.7m euro equivalent at acquisition date, €1.8m euro equivalent at prior year-end date) based on their expectation of performance in the transitional period.

Performance exceeded expectation and the final settlement in the current year was $3.0m (€2.4m euro equivalent at date of payment €2.1m euro equivalent at acquisition rate), resulting in an increase in the value of the brand in the current year of $0.6m (€0.4m).

2012
€m
Adjustment
€m
2013
€m

Hornsby’s cider brand

     

Brand

16.6 0.4 17.0

Inventories

1.7 - 1.7
     

Total consideration

18.3 0.4 18.7
     

Satisfied by:

     

Cash

16.4 - 16.4

Contingent consideration

1.7 0.4 2.1

Acquisition costs paid

0.2 - 0.2
     

Total consideration

18.3 0.4 18.7
     

Waverley wine brands

On 5 November 2012, the Group completed the acquisition of wine brands from Waverley TBS Limited for a consideration of £1.0m (€1.3m).

Brands have been attributed to reporting segments (as identified under IFRS 8 Operating Segments) as follows:-

Cider Tennent’s Third Party
UK UK International Brands UK Total
€m €m €m €m €m
         

At 1 March 2011

11.4 75.2 - - 86.6

Translation adjustment

0.2 1.1 0.3 - 1.6

Acquisition of Hornsby’s brands

- - 16.6 - 16.6

At 29 February 2012

11.6 76.3 16.9 - 104.8
         

Translation adjustment

(0.5) (2.4) 0.9 (0.1) (2.1)

Acquisition of Vermont brands

- - 159.0 - 159.0

Acquisition of Waverley wine brands

- - - 1.3 1.3

Additional consideration re prior year acquisition of Hornsby’s brands

- - 0.4 - 0.4
         

At 28 February 2013

11.1 73.9 177.2 1.2 263.4
         

Capitalised brands include the Tennent’s beer brands and the Gaymers cider brands acquired during the financial year ended 28 February 2010, the Hornsby’s cider brand acquired during the year ended 29 February 2012 and the Vermont cider brands and Waverley wine brands acquired in the current financial year. The Tennent’s and Gaymers brands were valued at fair value on the date of acquisition in accordance with the requirements of IFRS 3 (2004) Business Combinations by independent professional valuers. The Hornsby’s cider brand was valued at cost. The Vermont cider brands acquired in the current year were valued at fair value on the date of acquistion in accordance with the requirements of IFRS 3 (2008) Business Combinations.

Capitalised brands are regarded as having indefinite useful economic lives and therefore have not been amortised. The brands are protected by trademarks, which are renewable indefinitely in all major markets where they are sold and it is the Group’s policy to support them with the appropriate level of brand advertising. In addition, there are not believed to be any legal, regulatory or contractual provisions that limit the useful lives of these brands. Accordingly, the Directors believe that it is appropriate that the brands be treated as having indefinite lives for accounting purposes.

No intangible assets were acquired by way of government grant, there is no title restriction on any of the capitalised intangible assets and no intangible assets are pledged as security. There are no contractual commitments in relation to the acquisition of intangible assets at year-end.

Other intangible assets

Other intangible assets comprise 20 year distribution rights for third party beer products. These were valued at fair value on the date of acquisition in accordance with the requirements of IFRS 3 (2004) Business Combinations by independent professional valuers. Other intangible assets have finite lives and are subject to amortisation on a straight line basis over the length of the distribution arrangements. The amortisation charge for the year ended 28 February 2013 is €0.1m (2012: €0.1m).

Impairment testing

To ensure that goodwill and brands considered to have an indefinite useful economic life are not carried at above their recoverable amount, impairment reviews are performed comparing the carrying value (‘value-in-use’) of the assets with their recoverable amount using value-in-use computations. Impairment testing is performed annually or more frequently if there is an indication that the carrying amount may not be recoverable.

For goodwill and brands, the recoverable amount is calculated in respect of each operating segment (which may comprise of more than one cash generating unit). These operating segments represent the lowest levels within the Group at which the associated goodwill and indefinite life brands are monitored for management purposes and are not larger than the operating segments determined in accordance with IFRS 8 Operating Segments.

Value-in-use is calculated on the basis of estimated future cash flows discounted to present value and terminal values calculated on the assumption that cash flows continue in perpetuity. The key assumptions used in the value-in-use computations are:-

  • Expected volume, net revenue and operating profit growth rates - cash flows for each operating segment are based on detailed financial budgets and plans, formally approved by the Board, for years one to three,
  • Long term growth rate - cash flows after the first three years were extrapolated using a long term growth rate, on the assumption that cash flows for the first three years will increase at a nominal growth rate in perpetuity,
  • Discount rate.

The key assumptions used in the value-in-use computations were based on management assessment of anticipated market conditions for each operating segment. A terminal growth rate of 2.5% (2012: 2.5%) in perpetuity was assumed based on an assessment of the likely long term growth prospects for the sectors in which the Group operates. The resulting cash flows were discounted to present value using a range of discount rates between 8-12% (2012: 8-12%).

In formulating the budget and three year plan the Group takes into account external factors such as macro economic factors, inflation expectations by geography, regulation and expected changes in regulation (duty rates, minimum pricing etc), sales price trend, competitor activity, market share targets and strategic plans and initiatives.

The Group has performed the detailed impairment testing calculations by operating segment with the following discount rates being applied:

Operating segment Discount rate

ROI

8%

Tennent's GB

10%

Tennent's NI

10%

Cider GB

10%

Cider NI

10%

International Brands

12%

Hornsby

8%

Third Party Brands - UK

9%

No impairment losses were recognised by the Group in the current or previous financial year.

Sensitivity analysis

The impairment testing carried out at 28 February 2013 identified significant headroom in the recoverable amount of the brands and goodwill compared to their carrying values in all business segments. The key sensitivities for the impairment testing are net revenue and operating profit growth assumptions, discount rates applied to the resulting cashflows and the expected long term growth rates. No material adjustments to the assumptions underlying the impairment testing models applied would result in any foreseeable risk of an impairment arising.

14. EQUITY ACCOUNTED INVESTEES/FINANCIAL ASSETS

(a) Investment in equity accounted investees - Group

Maclay Thistle Pub 2013 2012
Group plc Company
€m €m €m €m
       

Investment in equity accounted investees

       

Purchase price paid

2.5 0.4 2.9 -

Less derivative financial assets

(1.4) - (1.4) -

Add derivative financial liabilities

1.0 0.2 1.2 -

Share of profit

- - - -

Translation adjustment

(0.2) (0.1) (0.3) -
       

Carrying amount at end of year

1.9 0.5 2.4 -

Maclay Group plc

On 21 March, 2012, the Group acquired a 25% equity investment in Maclay Group plc, a leading independent Scottish operator of managed public houses. The business primarily includes the operation of 15 wholly owned managed houses and 11 managed houses owned by two separate Enterprise Investment Schemes.

The total cost of the investment was £2.1m (equivalent to €2.5m at date of investment) of which €2.1m related to the value of the investment, (€1.9m value at year end date) €1.4m related to the value of a contracted derivative financial asset less €1.0m relating to the value of a contracted derivative financial liability. The derivative financial asset relates to a put option granted to the Group enabling it to sell its equity stake back to Maclay Group plc at a predetermined price at any time after the fifteenth anniversary of the acquisition, while the derivative financial liability relates to the granting of a call option to Maclay Group plc enabling it to buy back the Group’s equity interest at a predetermined price at any time in the first fifteen years after the acquisition date. The movement in the fair value of these derivatives from date of acquisition to 28 February 2013 was less than €0.1m.

The Group is in a position to exercise significant influence over the operating and financial policies of the investment and accordingly has accounted for it as an associate. Associates are included in the financial statements of the Group using the equity method from the date of which significant influence is deemed to arise until such a time as such significant influence ceases to exist. Under the equity method, the Group Income Statement reflects the Group’s share of profit after tax of the associate. Investment in associates are carried in the Group Balance Sheet at cost and subsequently adjusted in respect of post-acquisition changes in the Group’s share of net assets, less any impairment in value. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group’s interest in the equity. Unrealised losses are eliminated in the same manner as unrealised gains, but only to the extent that there is no evidence of impairment in the Group’s interest in the entity. The profit for the period attributable to the Group was less than €0.1m.

Thistle Pub Company Limited

On 28 November 2012, the Group invested £0.3m (€0.4m at date of payment, €0.3m at year-end rate) in a joint venture with Maclay Group plc in Thistle Pub Company Limited. As part of the joint venture agreement, the Group granted Thistle Pub Company Limited and the Maclay Group plc a call option enabling either of them to purchase the Group’s share of the equity at a fixed price at any time in the first 15 years after the date the joint venture was formed. This call option has been valued at the acquisition date and resulted in the recognition of a £0.2m (€0.2m) financial liability. The movement in fair value of this derivative to 28 February 2013 was less then €0.1m. The joint venture purchased one public house in the current year since its formation.

(b) Investment in subsidiary undertakings - Company

2013 2012
€m €m
   

Equity investment in subsidiary undertakings at cost

   

At beginning of year

968.8 966.2

Investment in subsidiary undertakings

5.3 -

Capital contribution in respect of share options granted to employees of subsidiary undertakings

3.0 2.6
 

At end of year

977.1 968.8

The total expense of €3.0m (2012: €2.6m) attributable to share options granted to employees of subsidiary undertakings has been included as a capital contribution in financial assets.

In the opinion of the Directors, the shares in the subsidiary undertakings are worth at least the amounts at which they are stated in the balance sheet. Details of subsidiary undertakings are set out in note 28.

15. INVENTORIES
2013 2012
€m €m
   

Group

   

Raw materials & consumables

28.7 29.0

Finished goods & goods for resale

20.2 17.1
 

Total inventories at lower of cost and net realisable value

48.9 46.1
   

Inventory write-down recognised as an expense within operating costs amounted to €0.8m (2012: €0.3m). Previously impaired inventory recovered during the financial year and recognised as exceptional income (note 5) amounted to €1.0m (2012: €0.7m).

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