for the year ended 31 March 2016
2016 |
|
|---|---|
| Acquisition of subsidiaries | |
| 16.1 Business Connexion Group Limited (BCX) |
|
| On 25 August 2015, Telkom acquired the entire issued ordinary share capital and the entire issued "A" ordinary shares of Business Connexion Group (BCX). | |
| The total purchase consideration of R2.7 billion was funded through Telkom’s own cash resources. | |
| BCX provides innovative business solutions based on information and communication technology and runs ICT systems and manages products, services and solutions for a wide range of customers. | |
| The merger will enable Telkom to expand its existing offerings while, at the same time, providing scale in IT services, which will help reinforce Telkom’s core connectivity business and enhance Telkom’s convergence strategy. | |
| The acquisition has been accounted for using the acquisition method. The date of acquisition is 31 August 2015 and the annual financial statements include the BCX results for the seven month ended 31 March 2016. | |
| The fair value of the identifiable assets and liabilities at acquisition date were determined as follows: | |
| Assets | |
| Property, plant and equipment | 461 |
| Intangible assets | 652 |
| Investment in joint venture & associates and long term loan receivable | 74 |
| Deferred tax | 117 |
| Trade and other receivables | 1 882 |
| Inventories | 227 |
| Income tax receivable | 14 |
| Cash and cash equivalents | 399 |
| Total assets | 3 766 |
| Liabilities | |
| Long Term debt | 300 |
| Non-current finance leases | 38 |
| Deferred taxation | 129 |
| Non-current provisions | 5 |
| Trade and other payables | 1 192 |
| Current portion of long term debt | 169 |
| Current portion of finance leases | 23 |
| Income tax payable | 23 |
| Current portion of provision | 158 |
| Contingent liability | 68 |
| Total liabilities | 2 105 |
| Total identifiable net assets at fair value | 1 661 |
| Non controlling interest at proportional share of net assets | 126 |
| Goodwill arising on acquisition | 1 119 |
| Purchase consideration transferred | 2 654 |
| Analysis of cash flows at acquisition: | |
| Net cash acquired with the subsidiary (included in cash flows from investing activities) | |
| Cash paid | 2 654 |
| BCX cash at aqcuisition | (399) |
| Net cash flow on acquisition | 2 255 |
| At the date of the acquisition, the fair value of the trade receivables at R1 424 million approximated its carrying value. | |
| From the date of acquisition, BCX has contributed R 4 116 million of revenue and R499 million loss to the net profit before tax from the continuing operations of the Group.This is after eliminating inter-company revenue of R694 million. If the acquisition had taken place at the beginning of the year, Telkom group revenue from continuing operations would have been R40 768 million and the Telkom group profit from continuing operations for the period would have been R2 524 million. | |
| The goodwill recognised is primarily attributed to the expected synergies and other benefits from combining the assets and activities of BCX with those of the Group. The goodwill is not deductible for income tax purposes. | |
| Transaction costs of R103 million, which includes issue costs, have been expensed since the inception of the acquisition. These expenses were recognised in service fees. | |
| A contingent liability of R68m was recognised at acquisition of BCX. The amount is an estimate in relation to BCX tax matters in Africa. The timing and the actual amount of this obligation is uncertain. | |
| As at 31 March 2016, the BCX and Telkom initial business combination was complete. | |
| 16.2 Anco IT (Pty) Ltd (Anco) | |
| On 1 November 2015 BCX acquired the entire issued ordinary share capital of Anco. | |
| The total purchase consideration of R41 million was in the form of cash, earn-out payments, a loan to BCX and deferred consideration. | |
| Anco provides innovative business solutions based on information and communication technology and runs ICT systems and manages products, services and solutions for a wide range of customers. | |
| The merger will enable BCX to expand its existing offerings while, at the same time, providing scale in IT services, which will help reinforce Telkom's core connectivity business and enhance BCX's strategy. | |
| The acquisition has been accounted for using the acquisition method. The date of acquisition is 1 November 2015 and the financial statements include the Anco results for the five months ended 31 March 2016. | |
| The fair value of the identifiable assets and liabilities at acquisition date were determined as follows: | |
| Assets | |
| Investment in joint venture and associates and long-term loan receivable | 2 |
| Deferred tax | 2 |
| Trade and other receivables | 7 |
| Cash and cash equivalents | 3 |
| Total assets | 14 |
| Liabilities | |
| Trade and other payables | 3 |
| Income tax payable | 2 |
| Total liabilities | 5 |
| Total identifiable net assets at fair value | 9 |
| Goodwill arising at acquisition (provisional) | 32 |
| Purchase consideration transferred | 41 |
| Analysis of cash flows at acquisition: | |
| Net cash acquired with the subsidiary (included in cash flows from investing activities) | 3 |
| Cash paid | 9 |
| Net cash flow on acquisition | 6 |
| Deferred purchase consideration | 33 |
| The earn out payments are based on the period as defined in the contract. The amount recognised is based on the likelihood of the company reaching the targets and is calculated as the present value of the earn out payments. The deferred purchase consideration was also calculated in accordance with the purchase agreement | |
| At the date of the acquisition, the fair value of the trade receivables approximated its carrying value. The gross amount of trade receivables is R7 million. | |
| From the date of acquisition, Anco has contributed R15 million of revenue and R1 million to the net profit from the continuing operations of the Group. If the acquisition had taken place at the beginning of the year, BCX revenue from continuing operations would have been R4 8 billion and the BCX group profit from continuing operations for the period would have been R133 million. | |
| The goodwill recognised is primarily attributed to the expected synergies and other benefits from combining the assets and activities of Anco with those of the Group. The goodwill is not deductible for income tax purposes. | |
| Transaction costs of R0 7 million, which includes issue costs, have been expensed since the inception of the acquisition. These expenses were recognised in service fees. | |
| The initial business combination was provisional and incomplete at the time the financial statements were authorised for issue. | |
| 16.3 UCS Solutions (Pty) Ltd (UCS) minority interest | |
| On 31 December 2015 the Telkom Group, through BCX group acquired the remaining 15% of the UCS Solution Proprietary Limited (and its holding in Integr8 IT Proprietary Limited),based on the vested put option agreement with shareholders. UCS and Integr8 are now a wholly owned subsidiary of BCX group. This transaction was accounted for as an equity transaction. | |
| 16.4 Common Control transactions | |
| On 1 November 2015 Cybernest (DCO), previously the IT business division of Telkom was sold to BCX to realise synergies. The transaction was financed through a loan from Telkom to BCX and accounted for as common control transaction. BCX recognised the acquired DCO assets at their carrying amount on the date of sale and the difference between the proceeds and the carrying amount of the DCO business was recognised as common control equity reserves. In Telkom company the difference between the carrying amount of the DCO business and proceeds was recognised in profit or loss. |
| 16.5 The Goodwill reconciliation | Rm |
| The Group's 2016 goodwill balance is reconciled as follows: | |
| Opening Balance (restated) | 63 |
| Acquisition of BCX* | 1 119 |
| Acquisition of Anco IT Proprietory Limited (provisional) | 32 |
| Impairment | - |
| Closing balance | 1 214 |
* R719 million is allocated to the Telkom CGU and R400 million is allocated to the BCX CGU.