27. Business combinations
Overview
This note covers the acquisitions of Scholle IPN on 1 June 2022 and Evergreen Asia on 2 August 2022. It also provides certain details about the acquisition of the remaining 50% of the shares of the Group’s two joint ventures in the Middle East on 25 February 2021.
Scholle IPN
Overview
On 1 June 2022, the Group acquired 100% of Scholle IPN from CLIL. CLIL is controlled by Laurens Last and has subsequently been renamed Clean Holding B.V. He was elected to the Company’s Board of Directors on 7 April 2022.
Scholle IPN provides packaging solutions for food and beverages, with retail, institutional and industrial customers and has production plants mainly in the Americas and Europe but also in Asia and Australia. Scholle IPN is the global leader in bag-in-box and number two in spouted pouches. It has approximately 2,500 employees globally.
This acquisition will enable the Group to expand its product portfolio, increase its presence in the USA and leverage its established presence in emerging markets. Synergies and cost efficiencies are expected in areas such as commercial operations, technology, innovation and sustainability as well as procurement and manufacturing.
The following table provides an overview of the consideration transferred, the recognised amounts of assets acquired and liabilities assumed at the acquisition date and the resulting goodwill. Since the close of the acquisition on 1 June 2022, the Group has finalised the completion accounts (see further section “Consideration” below) and the fair valuation of inventories, property, plant and equipment and intangible assets. There have been no material adjustments to the fair values initially recognised. As of 31 December 2022, the fair value of “Other net assets acquired” as well as current assets and liabilities has been measured on a provisional basis.
(In € million) |
|
|
|---|---|---|
Cash |
|
424.3 |
Shares (33,750,000 ordinary SIG shares) |
|
686.8 |
Contingent consideration |
|
38.6 |
Fair value of consideration |
|
1,149.7 |
Cash and cash equivalents |
|
46.6 |
Trade and other current receivables |
|
117.2 |
Inventories |
|
125.0 |
Property, plant and equipment |
|
210.3 |
Intangible assets |
|
290.3 |
Asset held-for-sale |
|
15.1 |
Trade and other current payables |
|
(88.9) |
Loans and borrowings |
|
(393.5) |
Deferred tax liabilities |
|
(120.9) |
Other net assets acquired |
|
5.1 |
Fair value of identifiable net assets acquired |
|
206.3 |
Goodwill, before impact of cash flow hedge accounting |
|
943.4 |
Impact of deal-contingent derivative |
|
(13.6) |
Goodwill |
|
929.8 |
“Other net assets acquired” mainly relates to deferred and current tax assets, right-of-use assets and employee benefits.
For the seven months ended 31 December 2022, the acquisition of Scholle IPN contributed revenue of €362.6 million and a profit of €2.1 million to the Group’s result (excluding acquisition-related and integration costs reflected in the acquired business but including the impact of provisional fair value adjustments, of which €19.4 million of fair value adjustments on inventories). If the acquisition had occurred on 1 January 2022, management estimates that for the year ended 31 December 2022, consolidated revenue would have been €3,021.5 million and consolidated profit would have been €42.1 million (including the gains on settlement of the deal-contingent derivatives). In determining these amounts, management has assumed that the provisional fair value adjustments as of the acquisition date would have been the same if the acquisition had occurred on 1 January 2022.
The Group has incurred total acquisition-related costs relating to Scholle IPN of €21.6 million in 2021 and 2022, of which €16.5 million has been recognised in the year ended 31 December 2022 (as part of other expenses).
Consideration
The consideration of €1,149.7 million for Scholle IPN is split between cash payments, newly issued SIG shares and contingent consideration.
At the acquisition date, the Company transferred €415.5 million ($445.1 million) in cash and 33,750,000 newly issued SIG ordinary shares with a fair value of €686.8 million to the former owner as consideration for Scholle IPN. The shares were issued from authorised share capital on 23 May 2022 (see note 24). The fair value of the shares was determined by reference to SIG’s share price of CHF 20.92 as of closing of the transaction on 1 June 2022. See notes 24 and 29 for additional information on the shareholding of the former ultimate beneficial owner of Scholle IPN, Laurens Last, who is also a related party to the Company via his representation on the Group’s Board of Directors.
The Group had retained an amount of €18.7 million ($20.0 million) as per the share purchase agreement. This was recognised as a current other liability and payable upon finalisation of the completion accounts, when cash, third-party debt and net working capital balances as of the acquisition date would be finally determined. The completion accounts were finalised in September 2022 and resulted in a total cash consideration of €424.3 million.
The contingent consideration depends on Scholle IPN outperforming the top end of the Group’s mid-term revenue growth guidance of 4–6% per year for the years ending 31 December 2023, 2024 and 2025, and would be payable in cash in three annual instalments of up to $100 million per year. Payments for growth rates ranging from 6 to 11.5% per the respective year will be made based on a pre-agreed ratchet structure. The fair value of the contingent consideration estimated as of the acquisition date is €38.6 million. The contingent consideration is presented as part of other non-current liabilities. As of 31 December 2022, the fair value of the contingent consideration is €113.2 million (see further notes 9 and 33).
Identifiable net assets acquired
The intangible assets mainly comprise customer relationships with a useful life of 12.5 years but also technology-related assets with a useful life of ten years and trademarks with a useful life of seven years. The property, plant and equipment balance primarily comprises production-related buildings and equipment.
One of the acquired production-related buildings was classified as held for sale at the acquisition date. It is now leased by the Group. The production-related building was sold by the Group in June 2022 for €15.1 million (its assessed fair value) in a sale and leaseback transaction that had been entered into before the closing of the acquisition. The transfer of the production-related building by the Group to the buyer qualifies to be accounted for as a sale under IFRS 16 Leases. The derecognition of the production-related building did not result in any gain or loss.
The fair value of trade receivables is assessed at €96.5 million. Trade receivables comprise gross contractual amounts due of €97.0 million, of which €0.5 million is expected to be uncollectible as of the acquisition date.
The Group repaid the external Euro and US Dollar loans of Scholle IPN in connection with the acquisition (see note 22). See the section “Deal-contingent derivatives” below for the impact of the settlement of a deal-contingent foreign currency derivative that the Group entered into for the repayment of the US Dollar loan.
Goodwill
Goodwill of €929.8 million for Scholle IPN has been recognised as of the acquisition date. The designation of a deal-contingent derivative as a hedging instrument in a cash flow hedge reduced the goodwill by €13.6 million (see the section “Deal-contingent derivatives” below).
As of 31 December 2022, the goodwill amounts to €917.8 million. The decrease from the amount initially recognised as goodwill relates to foreign currency exchange rate changes.
The goodwill mainly comprises expectations about expansion of existing markets, expansion into new geographical markets and product categories, the skills and competences of the workforce as well as cost savings and synergies. The goodwill is not expected to be deductible for tax purposes. It has been allocated to the segments Europe, MEA, APAC and Americas.
Assessment of fair values
The Group has applied generally accepted valuation methods in the assessment of the fair values of the acquired net assets, including the multi-period excess earnings method to assess the fair value of customer relationships. The fair value of the contingent consideration has been estimated using a Monte Carlo simulation (see further note 33).
Deal-contingent derivatives
To manage the foreign currency exposure arising from the part of the consideration for Scholle IPN that was payable in US Dollar and the repayment of the acquired US Dollar loan at the acquisition date, the Group entered into deal-contingent foreign currency derivatives after having signed the share purchase agreement.
The derivative for the consideration payable in cash was designated as a cash flow-hedging instrument in April 2022. For further details about the cash flow hedge accounting, refer to the section “Accounting policy” at the end of this note.
At the acquisition date, the cumulative positive fair value changes of the derivative of €13.6 million recognised in other comprehensive income (“OCI”) (net of the cost of hedging) reduced the amount of goodwill. Positive fair value changes recognised in other income in the year ended 31 December 2022 amount to €11.9 million (see notes 8 and 9). In total, the settlement of the derivative relating to the consideration paid in cash for Scholle IPN resulted in a net cash inflow of €25.5 million.
The Group did not apply hedge accounting under IFRS for the derivative relating to the repayment of the US Dollar loan. Positive fair value changes of this derivative are recognised in finance income (see notes 9 and 23). The settlement of the derivative relating to the repayment of the US Dollar loan resulted in a net cash inflow of €15.5 million.
Evergreen Asia
Overview
The Group acquired Evergreen’s chilled carton business in Asia Pacific (“Evergreen Asia”) on 2 August 2022 on a debt-free basis. It acquired 100% of the shares of Evergreen Packaging Korea Ltd., Evergreen Packaging (Shanghai) Co. Ltd. and Evergreen Packaging (Taiwan) Co. Ltd. from Evergreen Packaging International LLC (“Evergreen”).
Evergreen Asia provides filling machines, carton sleeves, closures and after-sales service to its customers in the chilled segment for dairy and non-carbonated soft drinks and has production plants in China, South Korea and Taiwan. Evergreen Asia has approximately 400 employees.
The acquisition will allow the Group access to a new customer base in an attractive growth market in Asia, especially in China, and to expand its offering to existing customers. The Group will use its experience to further develop the chilled carton business by drawing on its regional R&D presence and innovation capabilities as well as its marketing expertise to introduce more innovative packaging formats in the Asian chilled market. Synergies are expected from commercial opportunities and cost optimisation.
The following table provides an overview of the consideration transferred, the recognised amounts of assets acquired and liabilities assumed at the acquisition date and the resulting goodwill. As of 31 December 2022, the fair value of “Other net liabilities acquired” as well as current assets and liabilities has been measured on a provisional basis.
(In € million) |
|
|
|---|---|---|
Cash |
|
329.5 |
Fair value of consideration |
|
329.5 |
Cash and cash equivalents |
|
7.5 |
Trade and other current receivables |
|
31.2 |
Inventories |
|
26.8 |
Property, plant and equipment |
|
85.4 |
Right-of-use assets |
|
23.7 |
Intangible assets |
|
78.2 |
Trade and other current payables |
|
(35.7) |
Deferred tax liabilities |
|
(33.0) |
Other net liabilities acquired |
|
(16.4) |
Fair value of identifiable net assets acquired |
|
167.7 |
Goodwill, before impact of cash flow hedge accounting |
|
161.8 |
Impact of deal-contingent derivative |
|
(30.9) |
Goodwill |
|
130.9 |
“Other net liabilities acquired” mainly relates to deferred tax assets, current tax liabilities, provisions and employee benefits.
For the five months ended 31 December 2022, the acquisition of Evergreen Asia contributed revenue of €60.2 million and a profit of €2.8 million to the Group’s result (excluding acquisition-related and integration costs reflected in the acquired business but including the impact of provisional fair value adjustments). If the acquisition had occurred on 1 January 2022, management estimates that for the year ended 31 December 2022, consolidated revenue would have been €2,857.1 million and consolidated profit would have been €42.2 million (including the gain on settlement of the deal-contingent derivative). In determining these amounts, management has assumed that the provisional fair value adjustments as of the acquisition date would have been the same if the acquisition had occurred on 1 January 2022.
The Group has incurred total acquisition-related costs relating to Evergreen Asia of €10.0 million in 2021 and 2022, of which €7.2 million has been recognised in the year ended 31 December 2022 (as part of other expenses).
Consideration
The Group transferred €329.5 million ($335.9 million) in cash to Evergreen as consideration for Evergreen Asia on 2 August 2022. The final consideration was determined upon the completion settlement in February 2023, with no significant impact on the consideration transferred.
Identifiable net assets acquired
The intangible assets mainly comprise customer relationships with a useful life of 15 years but also technology-related assets with a useful life of seven years. The property, plant and equipment balance primarily comprises production-related buildings and equipment. The right of-use assets primarily relate to a prepaid land right-of-use in China.
The fair value of trade receivables is assessed at €30.3 million. Trade receivables comprise gross contractual amounts due of €30.5 million, of which €0.2 million is expected to be uncollectible as of the acquisition date.
Goodwill
Goodwill of €130.9 million for Evergreen Asia has been recognised as of the acquisition date. The designation of a deal-contingent derivative as a hedging instrument in a cash flow hedge reduced the goodwill by €30.9 million (see the section “Deal-contingent derivative” below). As of 31 December 2022, the goodwill amounts to €121.1 million. The decrease from the amount initially recognised as goodwill relates to foreign currency exchange rate changes.
The goodwill mainly comprises expectations about access to a new customer base in Asia, expansion of product offerings to existing customers, the skills and competences of the workforce as well as cost savings and synergies. The goodwill is not expected to be deductible for tax purposes. It has been allocated to the APAC segment.
Assessment of fair values
The Group has applied generally accepted valuation methods in the assessment of the fair values of the acquired net assets, including the multi-period excess earnings method to assess the fair value of customer relationships.
Deal-contingent derivative
To manage the foreign currency exposure arising from the consideration for Evergreen Asia that was payable in US Dollar, the Group entered into a deal-contingent foreign currency derivative after having signed the share purchase agreement. The derivative was designated as a cash flow-hedging instrument in April 2022. For further details about the cash flow hedge accounting, refer to the section “Accounting policy” at the end of this note.
At the acquisition date, the cumulative positive fair value changes of the derivative of €30.9 million recognised in OCI (net of the cost of hedging) reduced the amount of goodwill. Positive fair value changes recognised in other income in the year ended 31 December 2022 amount to €4.7 million (see notes 8 and 9). In total, the settlement of the derivative resulted in a net cash inflow of €35.6 million.
Former joint ventures in the Middle East
Overview
On 25 February 2021, the Company acquired the remaining 50% of the shares of its two joint ventures in the Middle East from its joint venture partner Al Obeikan Group for Investment Company CJS (“OIG”). The former joint ventures provide aseptic carton packaging solutions in the Middle East and Africa.
The fair value of the consideration transferred to OIG was €490.3 million. The Group transferred €167.0 million in cash and 17,467,632 newly issued SIG ordinary shares with a fair value of €323.3 million as consideration for the remaining shares of the joint ventures on 25 February 2021. The shares were issued from authorised share capital on 22 February 2021 (see note 24). There have been no post-closing adjustments to the consideration transferred.
The remeasurement to fair value of the Group’s pre-existing 50% interest in the joint ventures resulted in a gain of €48.8 million (including reclassification of amounts in the foreign currency translation reserve to profit or loss). The gain is recognised as part of other income (see notes 8 and 9).
The net assets acquired mainly consisted of property, plant and equipment, customer relationships and loans. Cash and cash equivalents acquired amounted to €103.4 million.
For the ten months ended 31 December 2021, the acquisition of the former joint ventures contributed incremental revenue of €166.0 million and a profit of €8.5 million to the Group’s result (excluding the gain on pre-existing interest in the former joint ventures and acquisition-related costs but including fair value adjustments). If the acquisition had occurred on 1 January 2021, management estimates that for the year ended 31 December 2021, consolidated revenue would have been €2,077.8 million and consolidated profit would have been €173.7 million.
The acquisition accounting was finalised in the fourth quarter of 2021 and resulted in acquired net assets of €202.8 million and goodwill of €518.4 million as of the acquisition date. Additional details about this acquisition and the outcome of the acquisition accounting are included in note 27 of the consolidated financial statements for the year ended 31 December 2021.
Accounting policy
Business combinations are accounted for using the acquisition method at the acquisition date when the acquired set of activities and assets meets the definition of a business and control is transferred to the Group.
The consideration transferred is generally measured at fair value, as are the identifiable net assets acquired. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss.
Contingent consideration is measured at fair value at the acquisition date. When contingent consideration is payable in cash, and therefore recognised as a financial liability, it is remeasured to fair value at each reporting date until it is settled. Any changes in the fair value are recognised in profit or loss as part of other income and expenses.
Goodwill is measured at the acquisition date as the fair value of the consideration transferred (including, if applicable, the fair value of any previously held equity interests and any non-controlling interests) less the net recognised amount (which is generally fair value) of the identifiable assets acquired and liabilities assumed. If the excess is negative, a bargain purchase gain is recognised immediately in profit or loss.
Transaction costs, other than those associated with the issue of debt or equity securities incurred in connection with a business combination, are expensed as incurred.
Subsequent changes in the fair value of acquired net assets or contingent consideration, and recognition of additional assets and liabilities, that result from new or additional information about facts and circumstances existing at the acquisition date that is obtained during the measurement period (maximum one year from the acquisition date) are measurement-period adjustments. Such adjustments are recognised retrospectively, and comparative information restated as if the accounting for the business combination had been completed at the acquisition date. After the end of the measurement period, the acquisition accounting is only adjusted to correct an error.
In a business combination achieved in stages, the equity interest in the acquired entity that was held by the Group before obtaining control is treated as if it were sold and subsequently repurchased. The pre-existing interest in the acquired entity is remeasured at fair value at the acquisition date. Any resulting gain or loss is recognised in profit or loss. Amounts recognised in other comprehensive income in prior periods that are related to the previously held interest are treated on the same basis as if the Group had disposed of the interest to a third party.
Cash flow hedging of the foreign currency risk on forecasted business combinations
To manage the foreign currency exposure arising from the US Dollar cash considerations for Scholle IPN and Evergreen Asia, the Group entered into deal-contingent foreign currency derivatives. These two derivatives have been accounted for as cash flow hedges. The derivatives were designated as hedging instruments when the respective acquisitions were assessed to be highly probable. The contingency element of the derivatives does not have a significant impact on the change in fair value of the derivatives during the hedge designation period.
From the hedge designation dates in April 2022, the effective portion of the fair value changes of the deal-contingent derivatives is recognised and accumulated in a hedging reserve in OCI (net of tax). The effective portion recognised in OCI is limited to the cumulative change in fair value of the hedged item from inception of the hedge. Fair value changes up to inception of the hedges are recognised in other income and expenses.
The Group designated only the change in fair value of the spot component of the respective derivative as the hedging instrument. The hedge relationship is therefore highly effective. The change in fair value of the forward component of the derivative is accounted for separately as a cost of hedging and recognised in equity. For simplicity, the cost of hedging is not presented separately in a cost of hedging reserve but presented net of the accumulated fair value changes in the hedging reserve. The cost of hedging is not significant.
The cash received on settlement of the hedging instrument when an acquisition takes place is not part of the consideration paid to the seller. However, the accumulated fair value changes in OCI (less the cost of hedging) are treated as a basis adjustment to goodwill under IFRS, ie. they impact the amount of goodwill recognised upon the acquisition.
Significant judgements and estimates
Significant judgements and estimates were made by management relating to the accounting for the acquisitions of Scholle IPN and Evergreen Asia in 2022 and of the remaining shares of the former joint ventures in 2021. For example, the assessments of the fair value of the contingent consideration for Scholle IPN and customer relationships involve significant judgement and estimates. The assessment of the fair value of the pre-existing interest in the former joint ventures also involved significant judgement and estimates.