| Wed 7 May 2008, 7:01 | | ABL - African Bank Investments Limited - Acquisiti |
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ABL ABLP
ABL
ABL - African Bank Investments Limited - Acquisition of Ellerine Holdings
Limited ("Ellerines") - Net asset value as at effective date (Including
Alignment of Accounting Policies) and Purchase Price Allocation
AFRICAN BANK INVESTMENTS LIMITED
(Incorporated in the Republic of South Africa)
(Registered bank controlling company)
(Registration number 1946/021193/06)
Ordinary share code: ABL & ISIN: ZAE000030060
Preference share code: ABLP & ISIN: ZAE000065215
("ABIL")
ACQUISITION OF ELLERINE HOLDINGS LIMITED ("ELLERINES") - NET ASSET VALUE AS AT
EFFECTIVE DATE (INCLUDING ALIGNMENT OF ACCOUNTING POLICIES) AND PURCHASE PRICE
ALLOCATION
Introduction
This announcement has been released in order to give investors an insight into
the acquisition date financial statements of Ellerines and to provide a more
meaningful understanding of the effect that Ellerines will have on the interim
results of the consolidated ABIL group to be published on 26 May 2008.
The acquisition date of Ellerines has been set at 7 January 2008, being the
nearest practical Ellerines month-end to when ABIL gained effective control of
the Ellerines group. As a result, the ABIL group will consolidate the Ellerines
balance sheet into its financial statements as at the above date, and will
include three months of Ellerines earnings into its interim results for the six
month period to 31 March 2008.
The process in determining the acquisition date financial statements has
involved the following steps:
1. The preparation of the Ellerines financial statements for the four
month period from 31 August 2007, being its last published year end,
to 7 January 2008, based on the consistent application of the
accounting policies of the Ellerines group.
2. Adjustments applied to the Ellerines financial statements as at 7
January 2008 in order to align them with ABIL`s accounting policies.
3. The calculation of the purchase price based on the issue of ABIL
shares in exchange for 100% of the Ellerines ordinary shares.
4. The application of IFRS 3 - Business Combinations, in order to
determine the allocation of the purchase price to the acquired assets
and liabilities and residual goodwill.
The following sections contain a detailed description of the above steps and the
attached annexures reflect the financial effects thereof.
1. Financial statements of Ellerines for the four month period ended 7 January
2008.
Ellerines last published financial statements were for the 12 months ended
31 August 2007, in which the net asset value, including intangible assets
and goodwill, was reported as R5 160 million. During the four month period
ended 7 January 2008, using consistently applied Ellerines accounting
policies, the group earned a net profit after tax of R406 million. In
addition, a net dividend of R135 million (117.3 cents per share final
dividend for 2007) was paid and there was a further R9 million reduction in
reserves for items charged directly to equity. This resulted in an increase
in the net asset value for the four month period to 7 January 2008 of R262
million to R5 422 million, prior to realignment of the accounting policies
and the application of IFRS 3.
2. Adjustments for the realignment to ABIL`s accounting policies
ABIL has conducted a detailed review of the Ellerines accounting policies
and the application thereof, and has made a number of adjustments to the
financial statements as at 7 January 2008, in order to bring these in line
with ABIL`s accounting policies. The adjustments set out below are
included on the attached annexures below which reflects their impact on the
Ellerines consolidated balance sheet as at 7 January 2008.
a) Insurance income recognition - pre introduction of the National Credit
Act ("NCA")
Prior to the introduction of the NCA, credit life and product
insurance was charged as a single upfront premium and this was
capitalised into the debtors loan account and repaid by the customer
over the term of the loan. A major portion of the premiums received
by the insurance company were then reinsured, and based on Ellerines`
interpretation of this reinsurance policy, a significant portion of
the premium income was recognised immediately as revenue.
ABIL, at the time of the due diligence, reviewed the terms of the
reinsurance contracts, and was of the view that the nature of these
contracts were more akin to stop loss / catastrophe cover, and in
substance very little underwriting risk is transferred to the
reinsurer. Consequently, since Ellerines retains nearly all the
underwriting risk, ABIL believes that the insurance premiums should be
amortised over the term of the policies. The effect of this change is
to reverse a portion of the income previously recognised, by raising a
provision of R339 million for unearned premiums, based on the
unexpired portion of the premiums as at 7 January 2008. Since no new
single premium policies were issued after the introduction of the NCA,
this unearned premium provision will unwind through the income
statement over the remaining 15 month average term of the policies.
d) Insurance income recognition - post NCA
The NCA requires that credit life and short term product insurance
policies be based on monthly premiums charged over the term of the
underlying credit agreement. Thus whilst the insurance company has a
conditional contract for a future string of premiums, the debtors
account will only be charged for premiums as and when they fall due.
Ellerines entered into reinsurance contracts for the total future
premiums and recognised the majority of these future premiums as
revenue. As a consequence, a receivable (actuarial insurance asset)
was created against which the future premiums would be set off as and
when they were received. Based on ABIL`s interpretation of the
reinsurance contracts as set out above, the acquisition date financial
statements of Ellerines have incorporated an adjustment of R628
million, being the reversal of the actuarial insurance asset, thereby
derecognising the unearned premium income. Given that VAT was paid on
the income previously recognised, a consequential change is the
creation of a VAT receivable asset of R124 million.
The net effect of the adjustments in paragraphs 2(a) and 2(b)
reinstates the future income stream on all insurance policies, such
that there is a constant yield earned over the term of a loan
agreement and related insurance policy, rather than the previously
front-end skewed income profile. Due to the short-term nature and
wide diversification of the insurance portfolio, ABIL has
traditionally not considered it appropriate to enter into reinsurance
contracts within its insurance subsidiary, and accordingly in line
with this principle Ellerines has cancelled all reinsurance
arrangements with effect from the end of March 2008.
c) Income recognition - loan origination fees
Ellerines charges an origination fee on all credit agreements, as
contemplated under the NCA, and recognised the income upfront on
origination of the loan. ABIL charges similar origination fees for
its loans granted, but raises a deferred administration fee provision,
which is then amortised over the term of the loan such that this
income is recognised as an effective yield over the term of the loan.
In order to align this accounting policy, the acquisition date
financial statements incorporate a provision for deferred
administration fees of R109 million as at 7 January 2008, with a
related deferred tax asset. All origination fees raised after 7
January 2008 will be accounted for on an effective yield basis, and
thus the provision for deferred administration fees will roll forward
in proportion to the advances book on which these fees are raised.
d) Provisions for doubtful debts
ABIL has conducted a detailed evaluation of the underwriting models
and loan portfolio as at 7 January 2008, compared to the view that was
obtained at the time of the due diligence, including vintage charts
and collection data on a basis similar to that which ABIL uses.
During this process, and evident from the vintage charts, it has
become clear that, as a result of changes to the underwriting models
introduced at the time of the NCA, the probability of default on loans
written by Ellerines post-NCA has risen sharply. In addition to this,
cash collection rates in Ellerines have also fallen during the period
leading up to December 2007.
Accordingly, a detailed evaluation of the adequacy of provisions on
impaired loans was performed, using ABIL`s IAS 39 provisioning models.
The Ellerines IAS 39 provisioning models are less conservative than
ABIL`s in that they are slower to reflect the impact of a
deterioration in cash collections and the discount factor used to
present value the expected cash flows needs to incorporate the total
yield earned on a loan (as adjusted above), rather than just the
interest rate earned on a loan. As a result, the acquisition date
financial statements contain a further increase of R340 million in
provisions for impaired loans.
Since gaining control of the Ellerines business, ABIL has implemented
certain initial underwriting changes to correct the high default rates that
emerged in the second half of 2007, and expects benefits from these to
begin to feed through during the latter part of the 2008 financial year.
3 Calculation of the purchase price
The acquisition of Ellerines was based on an equity-for-equity exchange,
and therefore in accordance with IFRS 3 - Business Combinations, the fair
value of the purchase consideration needs to be determined.
The total purchase consideration of 306 263 893 ABIL ordinary shares was
split into two parts, namely 294 706 784 ABIL ordinary shares issued to
Ellerines shareholders, and a further 11 557 109 ABIL ordinary shares
reserved for issue to facilitate a BEE programme similar to ABIL`s.
In accordance with IFRS 3, the ABIL share price on the acquisition date,
was R31.01, and therefore the fair value of the purchase consideration for
the 294 706 784 ABIL ordinary shares issued to Ellerines shareholders was
R9 139 million. In addition, costs borne by ABIL in relation to the
acquisition of Ellerines of R24 million will be allocated to the purchase
price.
In substance the 11 557 109 reserved BEE shares formed part of the gross
purchase consideration offered to Ellerines shareholders and were
sacrificed by them in order to facilitate a BEE programme in favour of
Ellerines stakeholders. However, since there was no irrevocable
committment to issue the reserved BEE shares to known parties prior to the
acquisition date, these shares will fall within the scope of IFRS 2 (Share
based payments), when issued.
As a result, when the BEE reserved shares are issued during the second half
of the current financial year, the fair value of these shares as determined
at the time of issue will be recorded as an expense through the income
statement with the corresponding credit to shareholder equity, and thus has
no effect on the net asset value of ABIL.
4. Purchase price allocation in terms of IFRS 3 - Business combinations
In terms of IFRS 3, when allocating the purchase price (as calculated
above), certain adjustments are required to be made to the balance sheet of
Ellerines on the acquisition date in order to consolidate the entity into
ABIL`s group financial statements and calculate the resulting goodwill on
acquisition. The primary steps relevant to Ellerines to complete this
exercise were to;
- Prepare a consolidated balance sheet for the Ellerines group as at 7
January 2008, being the acquisition date.
- Value all the assets and liabilities on the balance sheet at their
fair values as at the acquisition date.
- Recognise as an asset all identifiable intangible assets that meet the
definition of such in terms of IAS 38 - Intangible assets.
- Recognise as a liability all contingent liabilities, where the fair
value of that contingent liability can be reliably measured.
- Recognise goodwill as an asset, being the excess of the fair value of
the purchase price over the net asset value of Ellerines, after making
the above adjustments.
The adjustments set out below are included on the attached annexures, which
reflects the impact of these preliminary adjustments on the Ellerines
consolidated balance sheet (adjusted for accounting policy alignment) as at
7 January 2008. In terms of IFRS 3, ABIL has a period of 12 months from
date of acquisition to finalise the determination of these adjustments.
Some of these adjustments are best estimates at this stage based on
determinations which are still in the process of being finalised.
a) Fair value of assets and liabilities
i) Owner occupied properties have been increased by R93 million to
reflect the market valuation of these properties as at the
acquisition date and a corresponding deferred taxation liability
of R26 million has been raised. Future depreciation charges will
be based on the increased valuations.
ii) In terms of IFRS, existing property leases must be evaluated at
current market rentals and an asset or liability created to
reflect the present value of the differential rental over the
remaining term of the lease. In Ellerines` case, certain leases
are currently below equivalent market rentals and accordingly an
asset of R94 million has been raised, with a corresponding
deferred taxation liability of R27 million. This asset and
deferred tax liability will be amortised through the income
statement over the remaining term of the leases.
iii) As discussed in paragraph 2(d) above, ABIL`s analysis of the
loans underwritten during the period from June 2007 to December
2007 indicate a higher level of expected default than that which
was assumed in the Ellerines underwriting and pricing models.
ABIL anticipates that the actual credit losses that will emerge
out of this portfolio will be approximately 10% higher than
previous levels and those assumed in the pricing models. Loans
that have already defaulted are included in NPLs and therefore
the IAS 39 provisioning model has been updated to take into
account the lower expected cashflows.
However, loans that are classified as performing do not carry full
provisions and therefore these known but future losses will only be
recognised in future periods. Accordingly, ABIL has made a further fair
value adjustment to the carrying value of performing advances of
R403 million, based on a detailed model evaluating future expected
cashflows and comparing these to the underwriting assumptions.
This fair value adjustment will be netted off against gross advances and
amortised over the remaining term of the performing portfolio. The effect
of the above adjustment ensures that the carrying value (after impairment
and fair value adjustments) of the loans acquired on the 7 January 2008,
will earn a market related yield to maturity.
b) Intangible assets
i) The Ellerines consolidated balance sheet contains trademarks of
R311 million raised on the purchase of Relyant, which were deemed
to have an indefinite life. These have been reversed and the
total trademark values for all businesses within Ellerines have
been provisionally evaluated for the purposes of the ABIL
purchase price allocation.
ii) Valuations of all the brands within the Ellerines group are being
conducted by external experts and accordingly a provisional asset
of R1 002 million has been raised. In addition, in terms of IFRS
3, a deferred tax liability of R291 million has been raised
against these trademarks. The trademarks (together with related
deferred tax) will be amortised through the income statement
based on their estimated useful lives which ranges between 10 and
15 years (an average life of 12.5 years). Should the final
valuations and the audit thereof reveal any differences from the
above provisional value, adjustments will be made at the year-end
with a corresponding adjustment to goodwill.
c) Contingent liabilities
Contingent liabilities, as defined under IAS 37 - Provisions,
contingent liabilities and contingent assets, of R75 million have been
raised as at 7 January 2008, together with a related deferred tax
asset of R14 million.
d) Residual goodwill on acquisition of Ellerines
After adjusting for the above items, the net asset value of Ellerines
as at 7 January 2008, as reflected on the attached annexures, was
R4 604 million. Against the purchase price of R9 163 million, the
goodwill arising from the acquisition of Ellerines is R4 559 million
in addition to the historic goodwill of R767 million recorded in the
Ellerines balance sheet as at 7 January 2008.
Conclusion
The above adjustments, with the exception of the increased impairment
provisions, were anticipated at the time of the acquisition, and have
resulted in the establishment of a base for the accrual of income earned
from financial assets. The increased impairment provisions raised over and
above that considered necessary at the time of the due diligence, have
resulted in the net asset value of Ellerines on the acquisition date
financial statements being approximately R450 million lower than that which
was previously envisaged, and consequently the goodwill is higher by the
equivalent amount. The adjustments contained in this document creates the
platform to enable the measurement of the financial results of the
Ellerines business since its acquisition on a basis consistent with that of
ABIL.
This announcement is available on the African Bank Investments Limited website
at http://www.africanbank.co.za.
CONFERENCE CALL
Leon Kirkinis, ABIL`s CEO, will conduct a conference call for investors, fund
managers and analysts on Wednesday 07 May 2008. The conference call will take
the form of a short walk through of the announcement, followed by questions.
CONFERENCE CALL TIMES
South Africa: 16:00pm
United States: 09:00am Eastern Time
United Kingdom: 15:00pm
Access numbers for participants dialling from their country:
South Africa Toll 011 535 3600
Toll Free 0800 200 648
United States Toll 1 412 858 4600
Toll Free 1800 860 2442
United Kingdom Toll Free 0800 917 7042
PLAYBACK
A replay of the recording will be available for 48 hours should you be unable to
participate in the call and wish to listen to the announcement.
To access the replay please call:
South Africa +27 11 305 2030
Code 2134#
USA 1 412 317 0088
Code 2134#
UK 0808 234 6771
Code 2134#
Midrand
7 May 2008
Sponsor
RAND MERCHANT BANK (A division of FirstRand Bank Limited)
ANNEXURE A:
Ellerine Holdings Limited
Reconciliation of net asset value from 31 August 2007 to 7 January
2008 (acquisition date)
R`million Gross Less Net
taxation
effect
Net asset value as at 31 August 5,160
2007
Normal trading movements - 4 262
months to 7 January 2007
Net profit for the period 406
Dividends distributed (135)
Other movements in statement of (9)
changes in equity
Adjustments to align Ellerines (1,416) 411 (1,005)
accounting policies
Insurance income recognition - pre (339) 98 (241)
NCA loans
Insurance income recognition - post (628) 182 (446)
NCA loans
Income recognition - loan (109) 32 (77)
origination fees
Provisions raised on impaired loans (340) 99 (241)
Net asset value before PPA 4,417
adjustments
Purchase price allocation 400 (213) 187
adjustments
Fair value adjustment for land and 93 (26) 67
buildings
Fair value adjustment for operating 94 (27) 67
leases
Fair value adjustment for (403) 117 (286)
performing advances
Intangible assets (trademarks and
customer relationships)
Reversal of carrying value in (311) (311)
Ellerines
Fair value of intangible assets 1,002 (291) 711
recognised
Provision for contingent (75) 14 (61)
liabilities
Net asset value as at 7 January 4,604
2007 (acquisition date)
Calculation of purchase price and R`m
goodwill
Purchase price
No of share issued (excluding BEE 294,706,784
reserved shares)
ABIL ordinary share price on date 31.01
of acquisition (Rands)
Fair value of purchase 9,139
consideration
Capitalisation of ABIL`s 24
acquisition costs
Total purchase consideration 9,163
Net asset value of Ellerines on (4,604)
acquistion date
Goodwill arising on the acquisition 4,559
of Ellerines
ANNEXURE B:
Ellerines Holdings Limited
Consolidated balance sheet walkforward from 31 August 2007 to 7 January 2008
(acquisition date)
R million Consolid- Normal Consolidated Pre- Conso
ated trading Balance acqui- -lidated
Balance movements sheet as at stion Balance
sheet as for the 4 7 Jan 08 adjust sheet as at
at 31 moths to 7 (before -ments 7 Jan 08
Aug 07 Jan 08 adjustments) to align
accounti
ng
policies
Assets
Property and 403 7 410 410
equipment
Goodwill 767 767 767
Intangible assets 311 311 311
(Trademarks etc)
Deferred tax 87 (84) 3 411 414
asset
Inventories 598 212 810 810
Net advances 4,995 1,007 6,002 (1,540) 4,462
Gross advances 5,569 1,233 6,802 (1,091) 5,711
Deferred (109) (109)
administration
fees
Impairment (574) (226) (800) (340) (1,140)
provisions
Other assets 159 (14) 145 145
Taxation 3 (3) 0 0
Statutory assets - 505 73 578 578
bank and insurance
Short-term 160 (87) 73 73
deposits and
cash
Total assets 7,988 1,111 9,099 (1,129) 7,970
Liabilities
and equity
Bonds and other 457 (4) 453 453
long-term funding
Short-term 885 367 1,252 1,252
funding
Trade payables 1,235 386 1,621 (124) 1,497
& other
liabilities
Deferred tax 151 (50) 101 101
liability
Taxation 100 150 250 250
Total 2,828 849 3,677 (124) 3,553
liabilities
Ordinary 5,160 262 5,422 (1,005) 4,417
shareholders`
equity
Total 7,988 1,111 9,099 (1,129) 7,970
liabilities
and equity
R million Consoli- Purchase Consoli-
dated price allo- dated
Balance cation Balance
sheet as adjustment sheet as
at 7 Jan s (IFRS3) at 7 Jan
08 08 (ABIL
take on
position)
Assets
Property and equipment 410 93 503
Goodwill 767 767
Intangible assets (Trademarks 311 691 1,002
etc)
Deferred tax asset 414 131 545
Inventories 810 810
Net advances 4,462 (403) 4,059
Gross advances 5,711 (403) 5,308
Deferred administration fees (109) (109)
Impairment provisions (1,140) (1,140)
Other assets 145 32 177
Taxation 0 0
Statutory assets - bank and 578 578
insurance
Short-term deposits and cash 73 73
Total assets 7,970 544 8,514
Liabilities and equity
Bonds and other long-term 453 453
funding
Short-term funding 1,252 1,252
Trade payables & other 1,497 13 1,510
liabilities
Deferred tax liability 101 344 445
Taxation 250 250
Total liabilities 3,553 357 3,910
Ordinary shareholders` equity 4,417 187 4,604
Total liabilities and equity 7,970 544 8,514
Date: 07/05/2008 07:01:02 Produced by the JSE SENS Department.
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