Note 4. Mergers, Acquisitions and Disposals
4.1 Mergers and acquisitions
The Company has consummated certain mergers and acquisitions during 2017 and 2016; which were recorded using the acquisition method of accounting. The results of the acquired operations have been included in the consolidated financial statements since the date on which the Company obtained control of the business, as disclosed below. Therefore, the consolidated income statements and the consolidated statements of financial position in the years of such acquisitions are not comparable with previous periods. The consolidated statements of cash flows for the years ended December 31, 2017, 2016 and 2015 show the cash outflow and inflow for the merged and acquired operations net of the cash acquired related to those mergers and acquisitions.
4.1.1 Acquisition of Philippines
In January 25, 2013, Coca-Cola FEMSA acquired a 51.0% non-controlling majority stake in CCFPI from The Coca-Cola Company. As mentioned in note 20.7, Coca-Cola FEMSA has a call option to acquire the remaining 49.0% stake in CCFPI at any time during the seven years following the closing date. Coca-Cola FEMSA also has a put option to sell its ownership in CCFPI to The Coca-Cola Company commencing on the fifth anniversary of the closing date and ending on the sixth anniversary of the closing date. Pursuant to the Company’s shareholders’ agreement with The Coca-Cola Company, during a four-year period that ended on January 25, 2017, all decisions relating to CCFPI were approved jointly with The Coca-Cola Company.
Since January 25, 2017, Coca-Cola FEMSA controls CCFPI’s as all decisions relating to the day-to-day operation and management of CCFPI’s business, including its annual normal operations plan, are approved by a majority of its board of directors without requiring the affirmative vote of any director appointed by The Coca-Cola Company. The Coca-Cola Company has the right to appoint (and may remove) CCFPI’s Chief Financial Officer. Coca-Cola FEMSA has the right to appoint (and may remove) the Chief Executive Officer and all other officers of CCFPI. Commencing on February 1, 2017, Coca-Cola FEMSA started consolidating CCFPI’s financial results.
Coca-Cola FEMSA’s fair value of CCFPI net assets acquired to the date of acquisition (February 2017) is as follows:
| 2017 Final Purchase Price Allocation |
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Total current assets |
Ps. | 9,645 | ||
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Total non-current assets |
18,909 | |||
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Distribution rights |
4,144 | |||
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Total assets |
32,698 | |||
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Total liabilities |
(10,101 | ) | ||
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Net assets acquired |
22,597 | |||
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Net assets acquired attributable to the parent company (51%) |
11,524 | |||
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Non-controlling interest |
(11,072 | ) | ||
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Fair value of the equity interest at the acquisition date |
22,109 | |||
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Carrying value of CCFPI investment derecognized |
11,690 | |||
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Loss as a result of remeasuring to fair value the equity interest |
166 | |||
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Gain on derecognition of other comprehensive income |
2,996 | |||
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Total profit from remeasurement of previously equity interest |
Ps. | 2,830 | ||
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During 2017, the accumulated effect corresponding to translation adjustments recorded in the other comprehensive income for an amount of Ps. 2,996 was recognized in the income statement as a result of taking control over CCFPI. Coca-Cola FEMSA’s selected income statement information of Philippines for the period from the acquisition date through December 31, 2017 is as follows:
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Income Statement |
2017 | |||
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Total revenues |
Ps. | 20,524 | ||
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Income before income taxes |
1,265 | |||
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Net income |
Ps. | 896 | ||
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4.1.2 Acquisition of Vonpar
On December 6, 2016, Coca-Cola FEMSA through its Brazilian subsidiary Spal Industria Brasileira de Bebidas, S.A. completed the acquisition of 100% of Vonpar S.A. (herein “Vonpar”) for a consideration transferred of Ps. 20,992. Vonpar was a bottler of Coca-Cola trademark products which operated mainly in Rio Grande do Sul and Santa Catarina, Brazil. This acquisition was made to reinforce the Company’s leadership position in Brazil. Of the purchase price of approximately Ps. 20,992 (R$ 3,508), Spal paid an amount of approximately Ps. 10,370 (R$ 1,730) in cash on December 6, 2016.
On the same date Spal additionally paid Ps. 4,124 (R$ 688) in cash, of which in a subsequent and separate transaction the sellers committed to capitalize for an amount of Ps. 4,082 into Coca-Cola FEMSA in exchange for approximately 27.9 million KOF series L shares at an implicit value of Ps. 146.27. In May 4, 2017 Coca-Cola FEMSA merged with POA Eagle, S.A. de C.V., a Mexican company 100% owned by the sellers of Vonpar in Brazil, as per the announcement made on September 23, 2016. As a result of this merger, POA Eagle, S.A. de C.V. shareholders received approximately 27.9 million newly issued KOF series L shares. POA Eagle, S.A. de C.V. merged its net assets, principally cash for an amount of $4,082 million Mexican Pesos with Coca-Cola FEMSA.
At closing, Spal issued and delivered a three-year promissory note to the sellers, for the remaining balance of R$ 1,090 million Brazilian reais (approximately Ps. 6,534 million as of December 6, 2016). The promissory note bears interest at an annual rate of 0.375%, and is denominated and payable in Brazilian reais. The promissory note is linked to the performance of the exchange rate between the Brazilian real and the U.S. dollar. The holders of the promissory note have an option, that may be exercised prior to the scheduled maturity of the promissory note, to capitalize the Mexican peso amount equivalent to the amount payable under the promissory note into a recently incorporated Mexican company which would then be merged into Coca-Cola FEMSA in exchange for Series L shares at a strike price of Ps. 178.5 per share. Such capitalization and issuance of new Series L shares is subject to Coca-Cola FEMSA having a sufficient number of Series L shares available for issuance.
As of December 6, 2016, the fair value of KOF series L (KL) shares was Ps. 128.88 per share, in addition the KL shares have not been issued, consequently as a result of this subsequent transaction an embedded financial instrument was originated and recorded into equity for an amount of Ps. 485. In accordance with IAS 32, in the consolidated financial statements the purchase price was also adjusted to recognize the fair value of the embedded derivative arising from the difference between the implicit value of KL shares and the fair value at acquisition date.
Transaction related costs of Ps. 35 were expensed by Spal as incurred, and recorded as a component of administrative expenses in the accompanying consolidated income statements. Results of operation of Vonpar have been included in the Company’s consolidated income statements from the acquisition date.
Coca-Cola FEMSA’s allocation of the purchase price to fair values of Vonpar’s net assets acquired and the reconciliation of cash flows is as follows:
| 2017 Final Purchase Price Allocation |
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Total current assets (including cash acquired of Ps. 1,287) |
Ps. | 2,492 | ||
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Total non-current assets |
1,910 | |||
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Distribution rights |
14,793 | |||
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Net assets acquired |
19,325 | |||
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Goodwill |
2,152 | (1) | ||
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Total consideration transferred |
21,478 | |||
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Amount to be paid through Promissory Notes |
(6,992 | ) | ||
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Cash acquired of Vonpar |
(1,287 | ) | ||
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Amount recognized as embedded financial instrument |
485 | |||
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Net cash paid |
Ps. | 13,198 | ||
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| (1) | As a result of the purchase price allocation which was finalized in 2017, additional fair value adjustments from those recognized in 2016 have been recognized as follows: total current assets amounted to Ps. (1,898), total non-current assets amounted to Ps. (8,945), distribution rights of Ps. 5,191 and goodwill of Ps. (5,559). |
Coca-Cola FEMSA expects to recover the amount recorded as goodwill through synergies related to the available production capacity. Goodwill has been preliminary allocated to Coca-Cola FEMSA´s cash generating unit in Brazil. The goodwill recognized and expected to be deductible for income tax purposes according to Brazil tax law, is Ps. 1,667.
Selected income statement information of Vonpar for the period from the acquisition date through to December 31, 2016 is as follows:
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Income Statement |
2016 | |||
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Total revenues |
Ps. | 1,628 | ||
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Income before income taxes |
380 | |||
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Net income |
Ps. | 252 | ||
4.1.3 Acquisition of Grupo Socofar
On September 30, 2015, FEMSA Comercio – Health Division completed the acquisition of 60% of Grupo Socofar. Grupo Socofar is an operator of pharmacies in South America which operated, directly and through franchises, 643 pharmacies and 154 beauty supply stores in Chile, and over 150 pharmacies in Colombia. Grupo Socofar was acquired for Ps. 7,685 in an all cash transaction. Transaction related costs of Ps. 116 were expensed by FEMSA Comercio – Health Division as incurred, and recorded as a component of administrative expenses in the accompanying consolidated income statements. Socofar was included in operating results from the closing in September 2015.
The fair value of Grupo Socofar’s net assets acquired is as follows:
| 2016 Final Purchase Price Allocation |
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Total current assets (including cash acquired of Ps. 795) |
Ps. | 10,499 | ||
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Total non-current assets |
4,240 | |||
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Trademark rights |
3,033 | |||
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Total assets |
17,772 | |||
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Total liabilities |
(12,564 | ) | ||
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Net assets acquired |
5,208 | |||
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Goodwill |
4,559 | (1) | ||
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Non-controlling interest (2) |
(2,082 | ) | ||
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Total consideration transferred |
Ps. | 7,685 | ||
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| (1) | As a result of the purchase price allocation which was finalized in 2016, additional fair value adjustments from those recognized in 2015 have been recognized as follow: property, plant and equipment amounted of Ps. 197, trademark rights amounted of Ps. 3,033, other intangible assets with finite live amounted of Ps. 163 and deferred tax liabilities amounted of Ps. 1,009. |
| (2) | Measured at the proportionate share of the acquiree’s identifiable net assets. |
FEMSA Comercio – Health Division expects to recover the amount recorded as goodwill through synergies related to the implementation of successful practices from its existing Mexican operations such as speed and quality in execution of the customer’s value proposition and growth. Goodwill has been allocated to FEMSA Comercio Health Division cash generating units in South America (see Note 12).
Selected income statement information of Socofar for the period from the acquisition date through December 31, 2015 is as follows:
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Income Statement |
2015 | |||
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Total revenues |
Ps. | 7,583 | ||
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Income before income taxes |
394 | |||
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Net income |
Ps. | 354 | ||
FEMSA Comercio – Health Division entered into option transactions regarding the remaining 40% non-controlling interest not held by FEMSA Comercio – Health Division. The former controlling shareholders of Socofar may be able to put some or all of that interest to FEMSA Comercio – Health Division beginning (i) 42-months after the initial acquisition, upon the occurrence of certain events and (ii) 60 months after the initial acquisition, in any event, FEMSA Comercio – Health Division can call the remaining 40% non-controlling interest beginning on the seventh anniversary of the initial acquisition date. Both of these options would be exercisable at the then fair value of the interest and shall remain indefinitely.
4.1.3 Other acquisitions
During 2016, the Company completed a number of smaller acquisitions which in the aggregate amounted to Ps. 5,612. These acquisitions were primarily related to the following: (1) acquisition of 100% of Farmacias Acuña, a drugstore operator in Bogota, Colombia; at the acquisition date, Farmacias Acuña operated 51 drugstores.; (2) acquisition of an additional 50% of Specialty’s Café and Bakery Inc. shares, a small coffee and bakery restaurant (“Specialty’s”), reaching an 80% of ownership, with 56 stores in California, Washington and Illinois in the United States; (3) acquisition of 100% of Comercial Big John Limitada “Big John”, an operator of small-box retail format stores located in Santiago, Chile; at the acquisition date, Big John operated 49 stores; (4) acquisition of 100% of Operadora de Farmacias Generix, S.A.P.I. de C.V., a regional drugstore operator in Guadalajara, Guanajuato, Mexico City and Queretaro in Mexico; at the acquisition date, Farmacias Generix operated 70 drugstores and one distribution center; (5) acquisition of 100% of Grupo Torrey (which consist in many companies constituted as S.A. de C.V.), a Mexican company with 47 years of know-how in operation in the manufacture of equipment for the processing, conservation and weighing of foods, with corporate offices in Monterrey, Mexico and (6) acquisition of 80% of Open Market, a specialized company in providing end-to-end integral logistics solutions to the local and international companies which operate in Colombia. Transactions related costs in the aggregate amounted of Ps. 46 were expensed as incurred, and recorded as a component of administrative expenses in the accompanying consolidated income statements.
The fair value of other acquisitions’ net assets acquired in the aggregate is as follows:
| Final Purchase Price Allocation |
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Total current assets (including cash acquired of Ps. 211) |
Ps. | 1,125 | ||
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Total non-current assets |
3,316 | |||
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Total assets |
4,441 | |||
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Total liabilities |
(2,062 | ) | ||
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Net assets acquired |
2,379 | |||
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Goodwill |
3,204 | (2) | ||
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Non-controling interest (1) |
35 | |||
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Equity interest held previously |
369 | |||
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Total consideration transferred |
Ps. | 5,618 | ||
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| (1) | In the case of the acquisition of Specialty’s the non-controlling interest was measured at fair value at the acquisition date, and for Open Market the non-controlling interest was recognized at the proportionate share of the net assets acquired. |
| (2) | As a result of the purchase price allocation which was finalized in 2017, additional fair value adjustments from those recognized in 2016 have been recognized as follow: property, plant and equipment of Ps. 32, trademark rights of Ps. 836, other intangible assets of Ps. 983, and other liabilities of Ps. 593. |
During 2016, FEMSA Comercio has been allocated goodwill in the acquisitions in FEMSA Comercio – Retail Division in Chile and FEMSA Comercio – Health Division in Mexico and Colombia, to each one respectively. FEMSA Comercio expects to recover the amount recorded through synergies related to the adoption of the Company’s economic current value proposition, the ability to apply the successful operational processes and expansion planning designed for each unit.
Other companies dedicated to the production, distribution of coolers and logistic transportation services have been allocated goodwill of Grupo Torrey and Open Market, respectively in Mexico and Colombia. The companies dedicated to the production and distribution expect to recover the goodwill through synergies related to operative improvements; in the case of logistic transportation services, through the know how of specialized skills to attend pharmaceutical market and increasing new customers in the countries where the company operates.
Selected income statement information of other acquisitions in the aggregate amount for the period from the acquisition date through December 31, 2016 is as follows:
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Income Statement |
2016 | |||
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Total revenues |
Ps. | 2,400 | ||
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Income before income taxes |
(66 | ) | ||
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Net income |
Ps. | (80 | ) | |
The former controlling shareholders of Open Market retain a put for their remaining 20% non-controlling interest that can be exercised (i) at any time after the acquisition date upon the occurrence of certain events and (ii) annually from January through April, after the third anniversary of the acquisition date. In any event, the Company through one of its subsidiaries can call the remaining 20% non-controlling interest annually from January through April, after the fifth anniversary of the acquisition date. Both options would be exercisable at the then fair value of the interest and shall remain indefinitely. Given that these options are exercisable at the then fair value on exercise date, their value is not significant at the acquisition date and at December 31, 2017.
During 2015, the Company completed smaller acquisitions and mergers which in the aggregate amounted to Ps. 5,892. These acquisitions and mergers were primarily related to the following: acquisition of 100% Farmacias Farmacon, a regional drugstore operator in the western Mexican states of Sinaloa, Sonora, Baja California and Baja California Sur with headquarters in the city of Culiacan, Sinaloa, at the acquisition date Farmacias Farmacon operated 215 stores; merger of 100% of PEMEX franchises in which FEMSA Comercio – Fuel Division has been providing operational and administrative services for gasoline service stations through agreements with third parties, using the commercial brand name “OXXO GAS”, at the acquisition date there were 227 OXXO GAS stations; acquisition of 100% of “Zimag”, supplier of logistics services in Mexico, with experience in warehousing, distribution and value added services over twelve cities in Mexico mainly in Mexico City, Monterrey, Guanajuato, Chihuahua, Merida and Tijuana; acquisition of 100% of Atlas Transportes e Logistica, supplier of logistics services in Brazil, with experience in the service industry breakbulk logistics with a network of 49 operative centers and over 1,200 freight units through all regions in Brazil. Transactions related costs in the aggregate amounted of Ps. 39 were expensed as incurred, and recorded as a component of administrative expenses in the accompanying consolidated income statements.
The fair value of other acquisitions’ net assets acquired in the aggregate is as follows:
| Final Purchase Price Allocation |
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Total current assets (including cash acquired of Ps. 71) |
Ps. | 1,683 | ||
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Total non-current assets |
2,319 | |||
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Total assets |
4,002 | |||
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Total liabilities |
(2,955 | ) | ||
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Net assets acquired |
1,047 | |||
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Goodwill |
5,027 | (1) | ||
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Total consideration transferred |
Ps. | 6,074 | ||
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| (1) | As a result of the purchase price allocation which was finalized in 2016, additional fair value adjustments from those recognized in 2015 have been recognized as follow: property, plant and equipment amounted of Ps. 130, trademark rights amounted of Ps. 453 and other liabilities amounted of Ps. 1,202. |
FEMSA Comercio – Health Division and the logistic services business expect to recover the amount recorded as goodwill through synergies related to the ability to apply the operational processes of these business units. Farmacias Farmacon goodwill have been allocated to FEMSA Comercio – Health Division cash generating unit in Mexico and merger of PEMEX franchises goodwill have been allocated to FEMSA Comercio – Fuel Division cash generating unit in Mexico. Zimag and Atlas Transportes e Logistica goodwill have been allocated into logistic services business’s cash generating unit in Mexico and Brazil, respectively.
Selected income statement information of these acquisitions for the period from the acquisition date through December 31, 2015 is as follows:
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Income Statement |
2015 | |||
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Total revenues |
Ps. | 20,262 | ||
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Income before income taxes |
176 | |||
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Net income |
Ps. | 120 | ||
Unaudited Pro Forma Financial Data
The following unaudited consolidated pro forma financial data represent the Company’s historical financial statements, adjusted to give effect to (i) the acquisition of Coca-Cola FEMSA Philippines as if this acquisition has occurred on January 1, 2017; and (ii) certain accounting adjustments mainly related to the pro forma depreciation of fixed assets of the acquired company. Unaudited pro forma financial data for the acquisition included, is as follow.
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Unaudited pro forma financial information for the –year ended December 31, 2017 |
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Total revenues |
Ps. | 462,112 | ||
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Income before income taxes and share of the profit of associates and joint ventures accounting for using the equity method |
39,917 | |||
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Net income |
37,311 | |||
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Basic net controlling interest income per share Series “B” |
Ps. | 2.12 | ||
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Basic net controlling interest income per share Series “D” |
2.65 | |||
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The following unaudited consolidated pro forma financial data represent the Company’s historical financial statements, adjusted to give effect to (i) the acquisition of Vonpar, Farmacias Acuña, Specialty´s, Big John, Farmacias Generix, Grupo Torrey and Open Market as if these acquisitions have occurred on January 1, 2016; and (ii) certain accounting adjustments mainly related to the pro forma depreciation of fixed assets of the acquired companies. Unaudited pro forma financial data for all acquisitions and merger included, are as follow.
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Unaudited pro forma financial information for the –year ended December 31, 2016 |
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Total revenues |
Ps. | 410,831 | ||
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Income before income taxes and share of the profit of associates and joint ventures accounting for using the equity method |
29,950 | |||
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Net income |
28,110 | |||
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Basic net controlling interest income per share Series “B” |
Ps. | 1.08 | ||
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Basic net controlling interest income per share Series “D” |
1.35 | |||
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Below are unaudited consolidated pro forma data of the acquisitions made on 2015 as if Grupo Socofar, Farmacias Farmacon, Zimag, Atlas Transportes e Logística and merger of PEMEX franchises were acquired on January 1, 2015:
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Unaudited pro forma financial information for the –year ended December 31, 2015 |
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Total revenues |
Ps. | 340,600 | ||
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Income before income taxes and share of the profit of associates and joint ventures accounting for using the equity method |
27,485 | |||
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Net income |
25,004 | |||
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Basic net controlling interest income per share Series “B” |
Ps. | 0.97 | ||
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Basic net controlling interest income per share Series “D” |
1.21 | |||
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4.2. Disposal
During 2017, the Company sold a portion of its investment in Heineken Group, representing 5.2% of economic interest for Ps. 53,051 in an all cash transaction. With this transaction the Company took advantage of a Repatriation of Capital Decree issued by the Mexican government which was valid from January 19 until October 19, 2017; through this decree, a fiscal benefit was attributed to the Company due to repatriated resources obtained from the sale of shares. The Company recognized a gain of Ps. 29,989, as a result of the sales of shares within other income, which is the difference between the fair value of the consideration received and the book value of the net assets disposed. The gain is net of transaction related costs of Ps. 160 and includes reclassification from other comprehensive income of exchange differences on translation which amount to Ps. 6,632. Also, the Company reclassified from other comprehensive income to consolidated net income a total loss of Ps. 2,431, relating to the Company’s share of hedging reserve and translation reserve of Heineken Investment attributable to the portion of shares sold. None of the Company’s other disposals was individually significant (see Note 19).