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Business combinations (1): the Inchalam group (step) acquisition

On 22 December 2011, Bekaert announced the signing of an agreement with its Chilean partners to restructure the shareholding of their joint venture operations in Chile, Peru and Canada. The deal was finalized on 13March 2012, but came into effect as from 1 January 2012. As a consequence, Bekaert became the principal shareholder (52%) in the Inchalam Group and acquires control in all of the following entities:

  • Industrias Chilenas de Alambre – Inchalam SA in Talcahuano, Chile;
  • Acma Inversiones SA in Talcahuano, Chile;
  • Industrias Acmanet Ltda in Talcahuano, Chile;
  • Prodalam SA in Santiago, Chile;
  • Acma SA in Santiago, Chile;
  • Acmanet SA in Santiago, Chile;
  • Productos de Acero SA – Prodinsa in Maipú, Chile;
  • Prodinsa Ingeniería y Proyectos SA in Santiago, Chile;
  • Wire Rope Industries Ltd in Pointe-Claire, Canada;
  • Procables SA in Callao, Peru;
  • Impala SA in Panama, Panama.

By this strategic transaction, Bekaert strengthens its position in the steel wire business in Chile and the ropes business in Chile, Peru and Canada. Bekaert announced that it will further pursue the business strategy and approach in place and capitalize on synergies and future growth in the countries and businesses concerned.

The deal also involved Productos de Acero Cassadó SA (Prodac) in Callao, Peru, a subsidiary of the Bekaert Group. Prior to the deal, Bekaert owned 32% in Prodac via a Spanish holding, Bekaert Ideal SL, and 20% via the Inchalam group. In this transaction, Bekaert contributed its 32% interests in Prodac through Bekaert Ideal SL to the Inchalam group in exchange of 2% additional interests in the latter. The fair value of the interests in Prodac
given up was determined at USD 7.0 million (€ 5.5 million), using a discounted cash flow approach.
Consequently, Bekaert received new shares in Inchalam SA and Prodalam SA for an aggregate nominal value of USD 7.0 million (€ 5.5 million).

In accordance with IFRS 3 (revised 2008), when a business combination is achieved in stages, also known as a step acquisition, the Group’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date, and any resulting gain or loss is recognized in profit or loss. In this case, the fair value of the Group’s previously held 50% interest in the Inchalam Group was extrapolated from the USD 7.0 million purchase consideration of the 2% interest acquired, after deducting a control premium valued at USD 2.3 million. This extrapolation established the fair value at € 92.0 million. The carrying amount of the Group’s interest in the Inchalam group at the acquisition date amounted to € 77.5 million. This resulted in a gain on step acquisition of € 14.5 million, which is presented in ‘non-recurring items’ in the income statement.

In accordance with IFRS 3, any amounts arising from interests in the acquiree prior to the acquisition date that have been recognized in the Group’s other comprehensive income are reclassified to profit or loss, where such treatment would be appropriate if the interests were disposed of. This resulted in an additional gain of € 7.3 million from a reclassification of cumulative translation adjustments, which is also presented in ‘non-recurring items’ in the income statement.

Goodwill is measured as the difference between:
(i) The sum of the following elements:
  • a.Consideration transferred;
  • b.Amount of any non-controlling interests in the acquiree;
  • c.Fair value of the Group’s previously held equity interest in the acquiree; and
(ii) The net balance of the fair value of the identifiable assets acquired and the liabilities assumed.
Since the purchase consideration consisted of the Prodac shares, its cost is equivalent to the non-controlling interest disposed.

The initial accounting for the business combination resulted in a slightly positive goodwill (€ 0.9 million), after reviewing the provisional figures disclosed in the Group’s interim report of the 1rst semester 2012.
The table below presents the net assets acquired by balance sheet caption, showing the effect of fair value adjustments applied in accordance with IFRS 3 Business Combinations and the goodwill calculation. Together with the amount relating to the Southern Wire acquisition, it also clarifies the amount shown in the consolidated cash flow statement as ‘new business combinations’. 

Total
in thousands of € 		 Acquiree's carrying
amount before
combination		 Fair value
adjustments 		 Fair value
Intangible assets  833  -  833
Property, plant and equipment   74 644  44 072  118 716
Other non-current assets   3 695  -  3 695
Deferred tax assets   1 954  2 176  4 130
Inventories    88 198  293  88 491
Trade receivables    71 626  -281  71 345
Advances paid   247  -  247
Financial receivables   4 873  -  4 873
Other receivables   6 702  -  6 702
Short-term deposits   160  -  160
Cash and cash equivalents  10 364  -  10 364
Other current assets  880  -  880
Non-current employee benefit obligations   -4 373  -3 965  -8 338
Provisions   -  -1 049  -1 049
Non-current interest-bearing debt   -2 856  -  -2 856
Deferred tax liabilities   -5 465  -10 496  -15 961
Current interest-bearing   -50 829  -  -50 829
Trade payables  -36 364  -  -36 364
Advances received   -232  -  -232
Current employee benefit obligations   -5 672  -  -5 672
Current provisions   -798  -  -798
Income taxes payable  -1 270  -  -1 270
Other current liabilities   -1 249  -131  -1 380


Total net assets acquired in a business
combination 		  155 068 30 619  185 687
Equity method investment held prior to
business combination		        -77 515           -14 452       -91 967
Non-controlling interests arising on the acquirees  -  -  -89 178
Non-controlling interests disposed   -4 842  -645  -5 487
Goodwill   -  -  945
Consideration paid in cash   -  -  -
Cash acquired  -  -  -10 364
New business combinations   -  -  -10 364

The positive fair value adjustments on property, plant and equipment mainly relate to the land and buildings held by Inchalam, Prodalam and Wire Rope Industries. The fair value adjustments on inventories consist of two elements which almost outweighed each other: (1) Remeasurement at sales value less costs to complete less costs to sell and (2) Write-downs of slow moving and obsolete inventories to net realizable value. The first element is a one-time remeasurement required by IFRS 3 Business Combinations, which is generally reversed soon afterwards to the extent that the inventory goods are subsequently sold. Because the effect of this reversal generally is that no profit is made on the sales of these inventory goods, it has been presented in ‘non-recurring items’ in the income statement (€-4.9 million). The second element results from an analysis which isupdated at each balance sheet date and is not expected to be reversed soon. Therefore, any changes to the accumulated write-downs are recognized in recurring EBIT (REBIT).

The non-controlling interests disposed relates to the shares of Prodac which represent the consideration transferred in the acquisition.

The effect on consolidated sales and on the result for the period is shown below:

in thousands of €   Date of acquisition  Net sales for the
period		  Result for the period
Inchalam group (step) acquisition  1 January 2012  416 447 37 736

The result for the period includes a net non-recurring gain of € 16.9 million relating to the business combination accounting for this transaction.

Business combinations (2): the Southern Wire acquisition

On 30 August 2012, Bekaert announced the successful closing of the transaction to establish a joint venture, 55% owned by Bekaert and 45% by Southern Steel Berhad (SSB), a leading Malaysian Steel Group. The transaction consists of SSB contributing its interests in the Malaysian steel wire and ropes activities based in Shah Alam and Ipoh, and Bekaert bringing in the galvanized wire platform located in Karawang, Indonesia. The partnership with Southern Steel is meant to create a production and sales platform for steel wire and ropes activities in South-East Asia, that will leverage their mutual capabilities and technological expertise. The parent holding has been named Bekaert Southern Wire Pte Ltd with registered office in Singapore. The business combination came into effect as of 1 September 2012. As a consequence, Bekaert acquired control in following entities, all of which are based in Kuala Lumpur, Malaysia:
  • Bekaert Southern Wire Sdn Bhd;
  • Bekaert Southern Specialty Wire Sdn Bhd;
  • Cempaka Raya Sdn Bhd.
The initial accounting for the business combination resulted in a slightly positive goodwill (€ 0.3 million).

The table below presents the net assets acquired by balance sheet caption, showing the effect of fair value adjustments applied in accordance with IFRS 3 Business Combinations and the goodwill calculation. Together with the amount relating to the Inchalam group (step) acquisition, it also clarifies the amount shown in the consolidated cash flow statement as ‘new business combinations’.

Total
in thousands of € 		 Acquiree's carrying
amount before
combination 		 Fair value 
adjustments		 Fair value 
Intangible assets   3 686  4 018  7 704
Property, plant and equipment   7 857  -1142  6 715
Deferred tax assets   1 479  604  2 083
Inventories   7 752  762  8 514
Trade receivables   7 008  -309  6 699
Financial receivables   29  -  29
Other receivables   307  -  307
Cash and cash equivalents   1 925  -  1 925
Other current assets   253  -  253
Non-current employee benefit obligations   -1 598  -2  -1 600
Deferred tax liabilities   1 261  -3 344  -2 083
Current interest-bearing debt   -10 785  -  -10 785
Trade payables   -1 250  -610  -1 860
Advances received  -22  -  -22
Current employee benefit obligations   -706  -  -706
Current provisions   -62  -  -62
Other current liabilities   -427  -  -427


Total net assets acquired in a business
combination 		 16 707  -23  16 684
Non-controlling interests arising on the acquirees     -  -  -7 508
Non-controlling interests disposed         -6 621            1 313           -5 308
Goodwill  -  -  261
Consideration paid in cash  -  -  4 129
Cash acquired  -  -  -1 925
New business combinations  -  -  2 204

The non-controlling interests disposed relates to the contribution of 45% of the steel wire business in Indonesia.

The initial accounting of the above transaction was determined provisionally.

The effect on consolidated sales and on the result for the period is shown below:

in thousands of €   Date of acquisition Net sales for the
period 		 Result for the period 
Southern Wire (Malaysian entities)   1 September 2012  16 952 -3 689 

The result for the period includes a net non-recurring loss of € 1.9 million relating to the business combination accounting for this transaction. The main part of this relates to the reversal of the one-time remeasurement of inventories at sales value less costs to complete less costs to sell, which is required by IFRS 3 Business Combinations.

It is impracticable to recalculate the consolidated sales and results for the period as if the acquisition date were 1 January, mainly because this would cause undue effort and cost in view of its limited relevance.

Business disposals

On 2 April 2012, Bekaert sold its Industrial Coatings activities to Element Partners, a Pennsylvania, US-based equity fund. The transaction coveredthe production facilities in Deinze (Belgium) and Jiangyin (Jiangsu province, China), and the respective sales organization.

The table below presents the net assets disposed by balance sheet caption. It also clarifies the amount shown in the consolidated cash flow statement as ‘Proceeds from disposal of investments’.

in thousands of €  Industrial Coatings
activities		 Other disposals Total disposals
Intangible assets   -26  -  -26
Property, plant and equipment   591  253  844
Investments   -  5  5
Deferred tax assets   -12  -  -12
Inventories   1 357  -  1 357
Trade receivables   1 206  -  1 206
Advances paid   22  -  22
Other receivables   11  18  29
Cash and cash equivalents   -35  -  -35
Assets held for sale   31 363  -  31 363
Other current assets   -9  -  -9
Non-current employee benefit obligations   8  - 8
Provisions   5  - 5
Deferred tax liabilities   -43  - -43
Current financial liabilities   -729  - -729
Trade payables   -1 199  - -1 199
Advances received   1 370  - 1 370
Current employee benefit obligations   19  - 19
Current provisions   -35  - -35
Income taxes payable   -183  - -183
Liabilities associated with assets held for sale   -12 197  - -12 197
Other current liabilities   1 582  - 1 582

Total net assets disposed         23 066                       276                 23 342
Gain or loss (-) on business disposals   11 174  2 218  13 392
CTA recycled on disposal (non-cash)   -386  -312  -698
Cash disposed   35  -  35
Gain or loss (-) on non-consolidated investments             -  2 198  2 198
Proceeds from NCI disposal recognized in equity   -  1 379  1 379
Deferred proceeds   -16 101  -778  -16 879
Proceeds from disposals of investments   17 788  4 981  22 769

The proceeds of the other disposals relate to following transactions:

  • The sale of a venture capital fund called Sage Electrochromics, an investment which had been fully written down and recognized in research and development expense in prior years (€ 2.2 million);
  • The sale of the Flaring business (€ 1.4 million), a relatively small activity within the Group’s combustion technology business;
  • The sale to the Ecuadorean partners of their non-controlling interest in Prodac before the liquidation of Alambres Andinos SA (Alansa), the gain on which was recognized in equity, since there was no loss of control (€1.4 million).
  • The liquidation of Alansa and Bekaert Specialty Films (Sea) Pte Ltd (€ 0.03 million).

The contribution of the Industrial Coatings activities to the consolidated sales (before disposal) and to the result for the period (excluding the result on disposal) is shown below:

in thousands of €  Date of disposal Net sales for the
period 		  Result for the period
Industrial Coatings business  2 April 2012   11 236  833

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