Quarterly report pursuant to Section 13 or 15(d)

Acquisition

v2.4.0.8
Acquisition
 9 Months Ended
Nov. 30, 2013
Business Combinations [Abstract]  
ACQUISITION
ACQUISITION:

On June 7, 2013, the Company acquired (i)  the remaining 50% equity interest in Crown Imports (as defined in Note 11) (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 “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 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 the Mexican Beer Brands (as defined in Note 11) as of the date of acquisition, and certain extensions (all collectively referred to as the “Brewery Purchase”). The business of the Brewery Company and Service Company acquired by the Company 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, the Company is required to build out and expand the Brewery to a nominal capacity of at least 20.0 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 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 and the United States will have a right of approval, in its sole discretion, of any extension of the term of the interim supply agreement beyond three years. The estimated 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 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 estimated 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 three months ended November 30, 2013, the calculation of the Final EBITDA Amount was finalized requiring the Company 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:

•
The proceeds from the issuance of $1,550.0 million aggregate principal amount of May 2013 Senior Notes (as defined in Note 13);
•
$1,500.0 million in term loans consisting of a $500.0 million European Term A Facility (as defined in Note 13) and a $1,000.0 million European Term B Facility (as defined in Note 13) under the 2013 Credit Agreement (as defined in Note 13);
•
$675.0 million in term loans under the U.S. Term A-2 facility (as defined in Note 13) under the 2013 Credit Agreement;
•
$208.0 million in proceeds of borrowings under the Company’s then existing accounts receivable securitization facility;
•
$580.0 million in borrowings under the 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).

As a result of the closing of the Beer Business Acquisition without utilizing any of the commitments under an amended and restated bridge financing, this agreement terminated pursuant to its terms on June 7, 2013.

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

The purchase price of the Beer Business Acquisition and the estimated fair value of the Company’s preexisting 50% equity interest in Crown Imports have been allocated to the assets acquired and the liabilities assumed based on estimated fair values as of the acquisition date. As of the date of filing this Quarterly Report on Form 10-Q, the purchase accounting has not been finalized due primarily to the pending receipt of the final valuations for certain assets, including inventories, a favorable interim supply agreement, property, plant and equipment, and identifiable intangible assets. 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 the Company’s preexisting 50% equity interest in Crown Imports
(1,845.0
)
Less – cash acquired
(106.8
)
Estimated 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 preliminary 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 are being amortized over a life of 2 years; a definite lived distribution agreement with an estimated fair value of $0.4 million which is being 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 preliminary purchase price allocation, the Company 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 $1,649.4 million of the goodwill recognized is expected to be deductible for income tax purposes.

The Company has recognized acquisition-related costs of $44.7 million and $15.1 million for the nine months ended November 30, 2013, and November 30, 2012, respectively, and $8.9 million and $9.0 million for the three months ended November 30, 2013, and November 30, 2012, respectively. Through November 30, 2013, the Company has incurred total acquisition-related costs of $70.7 million, with $44.7 million recognized for the nine months ended November 30, 2013, and $26.0 million recognized for the year ended February 28, 2013. These costs are included in selling, general and administrative expenses on the Company’s Consolidated Statements of Comprehensive Income.

The results of operations of the Beer Business Acquisition is reported in the Company’s Beer segment and has been included in the consolidated results of operations of the Company from the date of acquisition. The following table sets forth the unaudited pro forma financial information for the nine months ended November 30, 2013, and November 30, 2012, and the unaudited historical and unaudited pro forma financial information for the three months ended November 30, 2013, and November 30, 2012, respectively. The unaudited pro forma financial information for the nine months ended November 30, 2013, and November 30, 2012, and the three months ended November 30, 2012, 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 nine months ended November 30, 2013, combines (i)  the Company’s historical statement of income for the nine months ended November 30, 2013; (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 nine months ended November 30, 2013, 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 for the nine months and three months ended November 30, 2012, combines (i)  the Company’s historical statements of income for the nine months and three months ended November 30, 2012; (ii)  Crown Imports’ historical statements of income for the nine months and three months ended September 30, 2012; and (iii)  the Brewery Business’ carve-out combined income statements for the nine months and three months ended September 30, 2012. 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 deferred financing costs and related income tax effects. The unaudited pro forma financial information excludes the estimated gain on the remeasurement to fair value of the Company’s preexisting 50% equity interest in Crown Imports and the acquisition-related costs noted above 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 the Company believes are reasonable under the circumstances. The unaudited pro forma financial information does not purport to present what the Company’s 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 the Company’s financial position or results of operations at any future date or for any future period.
 
For the Nine Months
Ended November 30,
 
For the Three Months
Ended November 30,
 
2013
 
2012
 
2013
 
2012
(in millions, except per share data)
 
 
 
 
 
 
 
Net sales
$
4,193.9

 
$
4,110.8

 
$
1,443.3

 
$
1,467.4

Income before income taxes
$
457.0

 
$
751.3

 
$
292.2

 
$
281.2

Net income
$
234.7

 
$
541.8

 
$
211.0

 
$
199.1

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic – Class A Common Stock
$
1.27

 
$
3.01

 
$
1.13

 
$
1.11

Basic – Class B Convertible Common Stock
$
1.15

 
$
2.74

 
$
1.03

 
$
1.01

 
 
 
 
 
 
 
 
Diluted – Class A Common Stock
$
1.19

 
$
2.87

 
$
1.07

 
$
1.05

Diluted – Class B Convertible Common Stock
$
1.10

 
$
2.64

 
$
0.98

 
$
0.97

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic – Class A Common Stock
164.082

 
158.442

 
165.708

 
158.270

Basic – Class B Convertible Common Stock
23.477

 
23.538

 
23.461

 
23.524

 
 
 
 
 
 
 
 
Diluted – Class A Common Stock
196.886

 
188.642

 
198.082

 
189.696

Diluted – Class B Convertible Common Stock
23.477

 
23.538

 
23.461

 
23.524