Annual report pursuant to Section 13 and 15(d)

Acquisitions

v3.4.0.3
Acquisitions
 12 Months Ended
Feb. 29, 2016
Business Combinations [Abstract]  
ACQUISITIONS
ACQUISITIONS:

Beer Business Acquisition –
On June 7, 2013, we acquired (i)  the remaining 50% equity interest in Crown Imports, a joint venture owned equally by a wholly-owned indirect subsidiary of the Company and Diblo, S.A. de C.V., an entity majority-owned by Grupo Modelo, S.A.B. de C.V. (“Modelo”) (the “Crown Acquisition”); and (ii)(a)  all of the issued and outstanding equity interests of Compañía Cervecera de Coahuila, S. de R.L. de C.V. (the “Brewery Company”), which owns and operates a brewery located in Nava, Coahuila, Mexico (the “Nava Brewery”), (ii)(b)  all of the issued and outstanding equity interests of Servicios Modelo de Coahuila, S. de R.L. de C.V., which provides personnel and services for the operation and maintenance of the Nava Brewery (the “Service Company”), and (ii)(c)  an irrevocable, fully-paid license to produce in Mexico (or worldwide under certain circumstances) and exclusively import, market and sell primarily Modelo’s Mexican beer portfolio sold in the U.S. and Guam as of the date of acquisition (the “Mexican Beer Brands”), and certain extensions (all collectively referred to as the “Brewery Purchase”). The business of the Brewery Company and Service Company that we acquired is referred to as the “Brewery Business.” The Crown Acquisition and the Brewery Purchase are collectively referred to as the “Beer Business Acquisition.”

In connection with the Beer Business Acquisition, we are required to build out and expand the Nava Brewery from 10 million hectoliters to a nominal capacity of at least 20 million hectoliters of packaged beer annually by December 31, 2016. In addition, an interim supply agreement and a transition services agreement were entered into in association with the Beer Business Acquisition. The interim supply agreement obligates the supplier to provide Crown Imports with a supply of product not produced by the Nava Brewery and the transition services agreement provides for certain specified services and production materials, both for a specified period of time. The associated agreements provide, among other things, that the United States will have approval rights, in its sole discretion, for amendments or modifications to the associated agreements as well as a right of approval, in its sole discretion, of any extension of the term of the interim supply agreement beyond three years. In December 2015, we extended the interim supply agreement through June 2017.

The aggregate purchase price of $5,226.4 million consists of cash paid at closing of $4,745.0 million, net of cash acquired of $106.8 million, plus the estimated fair value of an additional purchase price for the finalization of the Final EBITDA Amount (as defined in the stock purchase agreement) of $543.3 million, as well as additional cash payments for certain working capital adjustments. The fair value of the additional purchase price related to the Final EBITDA Amount was estimated by discounting future cash flows. During the third quarter of fiscal 2014, the calculation of the Final EBITDA Amount was finalized requiring us to make a payment of $558.0 million no later than June 7, 2014, consisting of the additional purchase price of $543.3 million plus imputed interest of $14.7 million.

The aggregate cash paid at closing was financed with:

•
Proceeds from the issuance of $1,550.0 million aggregate principal amount of May 2013 Senior Notes (see Note 11);
•
$2,175.0 million in term loans consisting of a $675.0 million U.S. Term A-2 loan facility, a $500.0 million European Term A loan facility and a $1,000.0 million European Term B loan facility under the 2013 Credit Agreement (see Note 11);
•
$208.0 million in proceeds of borrowings under our accounts receivable securitization facility (see Note 11);
•
$580.0 million in borrowings under our revolving credit facility under the 2013 Credit Agreement; and
•
Approximately $232.0 million of cash on hand (inclusive of $13.0 million of borrowings under a subsidiary working capital facility).

On June 6, 2014, we paid the Final EBITDA Amount of $558.0 million with $150.0 million in borrowings under the revolving credit facility under the May 2014 Credit Agreement (see Note 11), $100.0 million in proceeds of borrowings under our accounts receivable securitization facilities and $308.0 million of cash on hand.

Prior to the Beer Business Acquisition, we accounted for our investment in Crown Imports under the equity method of accounting. In connection with the acquisition method of accounting, our preexisting 50% equity interest was remeasured to its estimated fair value of $1,845.0 million, and we recognized a gain of $1,642.0 million for the second quarter of fiscal 2014. The estimated fair value of our preexisting 50% equity interest was based upon the estimated fair value of the acquired 50% equity interest in Crown Imports.

The aggregate purchase price of the Beer Business Acquisition and the estimated fair value of our preexisting 50% equity interest in Crown Imports have been allocated to the assets acquired and the liabilities assumed based upon the estimated fair value of each as of the acquisition date. The following table summarizes the allocation of the estimated fair value of the Beer Business Acquisition to the separately identifiable assets acquired and liabilities assumed as of June 7, 2013:
(in millions)
 
Cash
$
106.8

Accounts receivable
193.7

Inventories
243.1

Prepaid expenses and other
103.9

Property, plant and equipment
698.9

Goodwill
3,715.8

Intangible assets
2,403.2

Other assets
0.3

Total assets acquired
7,465.7

Accounts payable
123.2

Accrued excise taxes
14.4

Other accrued expenses and liabilities
72.9

Deferred income taxes
66.4

Other liabilities
10.6

Total liabilities assumed
287.5

Total estimated fair value
7,178.2

Less – fair value of our preexisting 50% equity interest in Crown Imports
(1,845.0
)
Less – cash acquired
(106.8
)
Aggregate purchase price
$
5,226.4



The acquired accounts receivable consist primarily of trade receivables, all of which have been collected. The acquired inventory was all sold during the second quarter of fiscal 2014. The intangible assets consist of definite lived customer relationships with an estimated fair value of $22.5 million which are being amortized over a life of 25 years; definite lived copyrights with an estimated fair value of $6.5 million which have been amortized over a life of 2 years; a definite lived distribution agreement with an estimated fair value of $0.4 million which has been amortized over a life of 1.6 years; a definite lived favorable interim supply agreement with an estimated fair value of $68.3 million which is being amortized over a life of 3 years; and a perpetual right to use trademarks with an estimated fair value of $2,305.5 million which is indefinite lived and therefore not subject to amortization.

In determining the purchase price allocation, we considered, among other factors, market participants’ intentions to use the acquired assets and the historical and estimated future demand for the acquired Mexican Beer Brands. The estimated fair values for the customer relationships and the copyrights were determined using a cost approach. The estimated fair value for the distribution agreement was determined using an income approach. The estimated fair value for the favorable supply contract was determined using an income approach, specifically, the differential method. The estimated fair value for the trademarks was determined using an income approach, specifically, the relief from royalty method.

The intangible assets are being amortized either on a straight-line basis or an economic consumption basis, which is consistent with the pattern that the economic benefits of the intangible assets are expected to be utilized based upon estimated cash flows generated from such assets. Goodwill associated with the acquisition is primarily attributable to the distribution of the Mexican Beer Brands in the U.S. as well as complete control over the sourcing of product into the U.S. Approximately $1,647.0 million of the goodwill recognized is expected to be deductible for income tax purposes.

The results of operations of the Beer Business Acquisition are reported in the Beer segment and have been included in our consolidated results of operations from the date of acquisition. The following table sets forth the unaudited pro forma financial information for the year ended February 28, 2014. The unaudited pro forma financial information presents consolidated information as if the Beer Business Acquisition had occurred on March 1, 2012. Because of different fiscal period ends, and in order to present results for comparable periods, the unaudited pro forma financial information for the year ended February 28, 2014, combines (i)  the Company’s historical statement of income for the year ended February 28, 2014; (ii)  Crown Imports’ historical statement of income for (a)  the three months ended March 31, 2013, and (b)  the period from June 1, 2013, through June 6, 2013; and (iii)  the Brewery Business’ carve-out combined income statement for the three months ended March 31, 2013. The unaudited pro forma financial information for the year ended February 28, 2014, does not give effect to the Brewery Business’ carve-out combined income statement for the period from June 1, 2013, through June 6, 2013, as it is not significant. The unaudited pro forma financial information is presented after giving effect to certain adjustments for depreciation, amortization of definite lived intangible assets, interest expense on acquisition financing, amortization of debt issuance costs and related income tax effects. The unaudited pro forma financial information excludes the gain on the remeasurement to fair value of our preexisting 50% equity interest in Crown Imports and acquisition-related costs of $52.3 million as both are nonrecurring amounts directly attributable to the transaction. The unaudited pro forma financial information is based upon currently available information and upon certain assumptions that we believe are reasonable under the circumstances. The unaudited pro forma financial information does not purport to present what our results of operations would actually have been if the aforementioned transaction had in fact occurred on such date or at the beginning of the period indicated, nor does it project our financial position or results of operations at any future date or for any future period.
 
For the Year
Ended
February 28,
2014
(in millions, except per share data)
 
Net sales
$
5,485.1

Income before income taxes
$
707.7

Net income attributable to CBI
$
398.6

 
 
Net income per common share attributable to CBI:
 
Basic – Class A Common Stock
$
2.14

Basic – Class B Convertible Common Stock
$
1.95

 
 
Diluted – Class A Common Stock
$
2.02

Diluted – Class B Convertible Common Stock
$
1.85

 
 
Weighted average common shares outstanding:
 
Basic – Class A Common Stock
164.687

Basic – Class B Convertible Common Stock
23.467

 
 
Diluted – Class A Common Stock
197.570

Diluted – Class B Convertible Common Stock
23.467



Other –
Ballast Point:
In December 2015, we acquired all of the issued and outstanding common and preferred stock of Home Brew Mart, Inc. d/b/a/ Ballast Point Brewing & Spirits (“Ballast Point”). The following table summarizes the preliminary allocation of the estimated fair value for the significant assets acquired:
(in millions)
 
Goodwill
$
761.8

Trademarks
222.8

Other
15.4

Total estimated fair value
1,000.0

Less – cash acquired
(1.5
)
Purchase price
$
998.5



Goodwill associated with the acquisition is primarily attributable to the future growth opportunities associated with the acquisition of a high-growth premium platform that will enable us to compete in the fast-growing craft beer category, further strengthening our position in the high-end U.S. beer market. None of the goodwill recognized is expected to be deductible for income tax purposes. The results of operations of Ballast Point are reported in the Beer segment and have been included in our consolidated results of operations from the date of acquisition.

Meiomi:
In August 2015, we acquired the Meiomi wine business, consisting primarily of the Meiomi trademark, related inventories and certain grape supply contracts for a purchase price of $316.2 million (“Meiomi”). The results of operations of Meiomi are reported in the Wine and Spirits segment and are included in our consolidated results of operations from the date of acquisition.

Glass Production Plant:
In December 2014, we completed the formation of an equally-owned joint venture with Owens-Illinois and the acquisition of a state-of-the-art glass production plant that is located adjacent to our Nava Brewery in Mexico. The joint venture owns and operates the glass production plant which provides bottles exclusively for our Nava Brewery. We have determined that we are the primary beneficiary of this VIE and accordingly, the results of operations of the joint venture are reported in the Beer segment and have been included in our consolidated results of operations from the date of acquisition. In addition, we also purchased a high-density warehouse, land and rail infrastructure at the same site. The aggregate purchase price for all of these assets was $290.6 million, net of cash acquired, consisting primarily of property, plant and equipment and goodwill.

Casa Noble:
In September 2014, we acquired the Casa Noble super-premium tequila brand. This transaction primarily included the acquisition of the Casa Noble trademark, plus an earn-out over five years based on the performance of the brands, (“Casa Noble”). The results of operations of Casa Noble are reported in the Wine and Spirits segment and are included in our consolidated results of operations from the date of acquisition.

Subsequent Event –
Prisoner:
In April 2016, we signed a definitive agreement to acquire The Prisoner Wine Company portfolio of brands for approximately $285 million, subject to customary closing conditions and adjustments. The transaction primarily includes the acquisition of trademarks, related inventories and certain grape supply contracts (“Prisoner”). The results of operations of Prisoner will be reported in the Wine and Spirits segment and will be included in our consolidated results of operations from the date of acquisition.