| (4) | Business and asset acquisitions |
| a) | Acquisition of Albertville Quality Foods, Inc. |
On July 14, 2017, the Company, through its subsidiary OK Foods, Inc., acquired 100% of the outstanding voting shares of Albertville Quality Foods, Inc. (Acquired Co. I). Acquired Co. I's operating results are included in the consolidated financial statements as of the date of acquisition. Acquired Co. I is dedicated to the production and sale of processed and value-added products based on animal protein, and is located in the state of Alabama, in the United States of America. The aggregate purchase price paid in cash amounted to $2,449,862 (138.10 million dollars). Acquired Co. I was merged with OK Foods, Inc. at the end of 2017.
The purchase of Acquired Co. I benefits the Company´s Poultry segment because it significantly increases OK Foods, Inc.´s product portfolio, significantly increases the client base in the United States of America and opens the opportunity for cross-sales between the clients of Acquired Co. I and OK Foods, Inc., significantly strengthening the presence of OK Foods, Inc. in the self-service channel. Regarding production activities, the acquisition increases the manual cutting process capacity, thereby reducing OK Foods, Inc.´s current cutting costs with external suppliers, and will optimize the production processes by adopting the best practices of both companies for the benefit of the operation as a whole. These benefits are not recognized separately from Goodwill because they do not meet the recognition criteria for identifiable intangible assets.
The assets acquired and the assumed liabilities of Acquired Co. I were recognized based on the best estimate of their fair value at the acquisition date.
The Company used various valuation techniques to determine fair value. Cost and market approaches were used to determine the value of the property, plant and equipment. Customer relationships and trademarks are valued based on discounted cash flow analysis, relief from royalty and multi-period excess earnings valuation approaches, which use significant unobservable inputs, or level 3 inputs, as defined by the fair value hierarchy. Under these valuation approaches, management made estimates and assumptions about sales, operating margins, growth rates, royalty rates and discount rates based on budgets, business plans, economic projections, anticipated future cash flows and marketplace data.
Due to their liquidity or short-term maturities, as appropriate, the Company concluded that Acquired Co. I´s pre-acquisition carrying amounts for cash equivalents, accounts receivable, other current assets, accounts payable and other current liabilities approximate their fair value at the acquisition date, while inventories are recorded at their net realizable value.
Identifiable assets acquired and liabilities assumed
The following is a summary of the recognized amounts of assets acquired and liabilities assumed at the acquisition date, compared to the consideration paid:
| | | Acquisition value | |
| | | | | |
| Current assets, other than inventories | | $ | 202,873 | |
| Inventories | | | 304,594 | |
| Property, plant and equipment | | | 547,987 | |
| Other current assets | | | 10,189 | |
| Intangible assets | | | 969,942 | |
| Total assets | | | 2,035,585 | |
| Current liabilities | | | (155,798) | |
| Deferred income tax | | | (472,088) | |
| Acquired net identifiable assets, net | | | 1,407,699 | |
| Consideration paid | | | 2,449,862 | |
| Goodwill at acquisition date | | $ | 1,042,163 | |
Goodwill arises because the transferred consideration exceeds the identifiable assets acquired net of liabilities assumed on the acquisition date.
The goodwill that arose from the acquisitions is not expected to be deductible for tax purposes.
Certain estimated values in the acquisition, including goodwill, intangible assets and deferred taxes, have not yet been definitively determined and are subject to revision as new information emerges and the analyses are completed. The purchase price was allocated based on the information available on the date of acquisition.
Had the acquisition occurred on January 1, 2017, management estimates that consolidated revenues and consolidated profits for the year ended December 31, 2017 would have totaled $61,093,104 and $5,202,397, respectively. In determining these amounts, management has assumed that the provisional adjustments to fair value recognized at the date of acquisition would have been similar if the acquisition had occurred on January 1, 2017.
Costs related to acquisition.
During 2017, the Company incurred costs related to the acquisition of Acquired Co. I of $16,145 corresponding to external legal fees and due diligence costs, which are included in other expenses in the Company’s consolidated statement of profit and loss and other comprehensive income for the year ended December 31, 2017 (note 30).
| b) | Acquisition of Proveedora La Perla, S.A. de C.V. |
On July 11, 2017, the Company acquired 100% of voting stock of Proveedora La Perla S.A. de C.V. (Acquired Co. II). Acquired Co. II's operating results are included in the consolidated financial statements as of that date. Acquired Co. II is dedicated to the production and sale of pet food and treats, and is located in the state of Queretaro, Mexico. The purchase price in cash amounted to $45,000.
The purchase of Acquired Co. II benefits the Other segment due to the fact that it expands its current production capacity for dry pet food. In addition, Acquired Co. II has equipment for the production of wet pet food and pet treats, which will allow the Company to enter this market where it currently does not participate. The production facilities of Acquired Co. II will allow for a reduction of logistics cost since they are within close proximity of the Company´s clients located in the central region of the country, and it will contribute improved customer service. This acquisition will allow for accelerated growth in the pet food business.
The assets acquired and the assumed liabilities of Acquired Co. II were recognized based on the best estimate of their fair value at the acquisition date.
The fair value of the assets was determined using cost and market approaches. The cost approach, which estimates the value based on the current replacement cost of an asset by another asset of equal usefulness, was used mainly for plant and equipment. The market approach, in which the value of an asset is based on available market prices for comparable assets, was used mainly for real estate.
Due to their liquidity or short-term maturities, as appropriate, the Company concluded that Acquired Co. II’s pre-acquisition carrying amounts for cash equivalents, accounts receivable, other current assets, accounts payable and other current liabilities approximate their fair value at the acquisition date, while inventories are recorded at their net realizable value.
Identifiable assets acquired and liabilities assumed
The following is a summary of the recognized amounts of acquired assets and assumed liabilities at the date, compared to the consideration paid:
| | | Acquisition value | |
| | | | | |
| Current assets, other than inventories | | $ | 13,835 | |
| Inventories | | | 5,846 | |
| Property, plant and equipment | | | 584,884 | |
| Total assets | | | 604,565 | |
| Current liabilities | | | (392,646) | |
| Deferred income tax | | | (79,423) | |
| Acquired net identifiable assets | | | 132,496 | |
| Consideration paid | | | 45,000 | |
| Bargain purchase gain (note 30) | | $ | 87,496 | |
The bargain purchase gain arises because the net of fair value of the assets at the acquisition date exceeds the amount of the consideration transferred. The business strategies followed by the acquiree in the past resulted in a high cost structure and limited opportunity for improving profitability, resulting in a fair value of the business below that of its component parts. For this reason, a gain was recognized in other income (expense) (see note 30) in the statement of profit and loss and other comprehensive income.
Had the acquisition occurred on January 1, 2017, management estimates that consolidated revenues and consolidated profits for the year ended December 31, 2017 would have totaled $58,182,059 and $5,086,470, respectively. In determining these amounts, management has assumed that the provisional adjustments to fair value recognized at the date of acquisition would have been similar if the acquisition had occurred on January 1, 2017.
Costs related to acquisition.
During 2017, the Company incurred costs related to the acquisition of Acquired Co. II of $15,465 corresponding to external legal fees and due diligence costs, which are included in other expenses in the Company’s consolidated statement of profit and loss and other comprehensive income.
| c) | Acquisition of assets from breeding farms from Morris Hatchery, Inc.2015 |
On July 10, 2015, the Company reached agreement to acquire assets from the breeding farms of Morris Hatchery Inc., located in the state of Georgia, United States of America. This acquisition mainly consists of poultry equipment and biological assets comprised principally of breeding birds that produce hatching eggs. The acquisition benefits the Company given that it did not previously have the capacity of breeding birds that produce hatching eggs, which are used internally. The Company concluded that the transactions represented the acquisition of businesses in accordance with IFRS 3.
Below is a summary of the fair value of the net assets acquired as of the acquisition date in conformity with IFRS 3, as well as the purchase price paid. The amounts are final; accordingly, the Company did not utilize the use of the provisional measurement period permitted by IFRS 3.
Acquired assets and identifiable assumed liabilities
| | | Acquisition value | |
| | | | | |
| Current and non-current biological assets | | $ | 235,486 | |
| Inventories | | | 300 | |
| Property, plant and equipment | | | 11,581 | |
| Acquired assets, net | | | 247,367 | |
| Cash consideration paid | | | 371,300 | |
| Goodwill | | $ | (123,933) | |
The acquisition costs paid by the Company were not material, given that it utilized mostly its own resources in the acquisition. Given that the acquisition was for the benefit of the Company’s own internal operations, it is impracticable to determine the amount of revenues or income attributable to the acquired business. Management believes that pro forma revenues and profit for the year, giving effect to the acquisition as of the beginning of the period, do not differ materially from historical revenues and profit for the year reported in the statements of profit or loss and comprehensive income.
