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BLUE LABEL
INTEGRATED ANNUAL REPORT 2017
Notes
to the Group annual financial statements
continued
For the year ended 31 May 2017
3.
Financial instruments and financial risks
continued
3.2 Financial liabilities continued
3.2.1 Trade and other payables continued
Acquisition of SupaPesa Africa Limited
The fair value of the contingent consideration arrangement of R29.9 million was originally estimated by applying the
income approach. The fair value estimates are based on a discount rate of 9.25%. For all profit targets management
has assumed a probability of 100% initially. In determining these probabilities management has assessed the cash
flow projections based on financial budgets for the forthcoming three years which are based on assumptions of the
business, industry and economic growth.
In the prior year management reassessed the cash flows taking into account the profit targets and the probability of
meeting these as well as the forecast financial budget. The probabilities have been adjusted downwards from 100% to
between 32% and 55%. This resulted in a release of R17.2 million into the income statement, included in other income.
In the current year management reassessed the cash flows taking into account the profit targets and the probability
of meeting these as well as the forecast financial budget. The probabilities have been adjusted downwards from
between 32% and 55% to between 13% and 28%. This resulted in a release of R5.5 million into the income
statement, included in other income.
Acquisition of Viamedia Proprietary Limited (Viamedia)
The contingent consideration arrangement requires Blue Label Telecoms Limited to pay in cash the former owner
of Viamedia, an additional amount of R215.6 million if certain profit warranties are achieved. The first three amounts
of R24.1 million are based on the profits of Viamedia for the year ended 31 May 2015 and 31 May 2016, and ending
31 May 2017. The fourth and fifth amounts of R30.9 million and R112.5 million are based on the profits of Viamedia
for the three years ending 31 May 2017.
Originally the fair value of the contingent consideration arrangement of R84.8 million was estimated by applying the
income approach. The fair value estimates were based on a discount rate of 9%. For the first, second, third and
fourth profit targets management had assumed a probability of 100%. For the fifth profit target management had
assumed a probability of 0%. In determining these probabilities management had assessed the cash flow projections
based on financial budgets for the forthcoming three years which were based on assumptions of the business,
industry and economic growth.
In the prior year management reassessed the cash flows taking into account the profit targets and the probability
of meeting these as well as the forecast financial budget. For the first, second and third profit targets, the probabilities
were adjusted downwards from 100% to between 84% and 100%. For the fourth profit target management had
assumed a probability of 0%. This resulted in a release of R30.8 million into the income statement in the prior year,
included in other income.
In the current year management reassessed the cash flows taking into account the profit targets and the probability
of meeting these as well as the forecast financial budget. For the third profit targets the probability has been adjusted
downwards from 100% to 77%. This has resulted in a release of R6.8 million into the income statement, included in
other income.
Acquisition of Reware Proprietary Limited
The contingent consideration arrangement requires Blue Label Telecoms Limited to pay in cash the former owner
of Reware an additional amount, totalling 10% of Reware’s net profit for the year ended May 2017 and 5% of
Reware’s net profit for the year ended May 2018, if certain profit warranties are achieved. The fair value of the
contingent consideration arrangement of R1.1 million was estimated by applying the income approach. The fair value
estimates are based on a discount rate of 10.5%.
Management assessed the cash flows taking into account the forecast financial budget, profit targets and the
probability of meeting these. The probability of Reware reaching the May 2017 target and May 2018 target was
assessed at 0% and 100% respectively. At year-end management reassessed the probability of Reware reaching the
May 2018 target based on new forecast financial budgets and adjusted it downwards from 100% to 0%. This has
resulted in a release of R1.3 million into the income statement, included in other income.
Acquisition of Utilities World Proprietary Limited
The contingent consideration arrangement required Blue Label Telecoms Limited to pay in cash the former owner of
Utilities World Proprietary Limited (Utilities World) an additional amount of R5 million if certain profit warranties were
achieved for the 12 months ended 28 February 2017. The fair value of the contingent consideration arrangement of
R4.5 million was estimated by applying the income approach. The fair value estimates were based on a discount rate
of 10.5%.
Management assessed the cash flows taking into account the forecast financial budget, profit targets and the probability
of meeting these. The probability of Utilities World reaching its target was initially assessed at 100%. While this target
was not met, Utilities World did reach a secondary target, requiring management to pay the former owners R4 million
post-year end.