Widgets R Us
ABC Company acquired Widgets R Us Limited on 30 June 2018 for $14,500.
You have been engaged by ABC to prepare its purchase price allocation for its 30 June 2018 financial statements. Attached is ABC’s bid model.
Set out below are a few extracts from the reports provided to the Board in relation to the acquisition:
? Widgets R Us manufactures branded widgets that it sells to its customers in Australia. Widgets R Us competes in the widget market. The widget market is relatively concentrated. The market leader is Doohickeys Unlimited, which has a 42% market share. Widgets R Us and Gizmos R Us have market shares of 24% and 19% respectively. The balance of the market is supplied from a variety of offshore manufacturers.
? Revenue from existing customers of Widgets R Us is expected grow at 2% per annum, consistent with historical trends Historically, approximately 15% of customers have churned each year, and that trend is expected to continue. The EBITDA margin for existing customers is expected to be 25%, somewhat more than the company as a whole.
? Widgets R Us replaces its assets as they wear out and its investment in fixed asset is not expected to change significantly. There is sufficient excess capacity in fixed assets to meet projected growth in sales volumes and the terminal cashflow capex projection provides enough capital for volumes implied by the terminal value assumptions. ABC’s finance team estimates that fixed assets of Widgets R Us could be leased for a cost of 9%. The replacement cost of the fixed assets has not changed significantly since they were acquired and the useful lives of the assets are equal to their accounting useful lives.
? Widgets R Us utilises internally generated software in its production process. The software was developed over the three years to 30 June 2017 at a cost of $1,250, as follows:
Historical costs
incurred $
2017 500
2016 450
2015 300
1250
The Widgets R Us brand is considered reasonably strong and contributed to the profitability and growth of Widgets R Us. ABC’s finance team identified the following comparable brand licensing arrangements:
? One of ABC’s subsidiaries licences the Gizmos R Us brand from a financial investor for 2.5%. Customer surveys reveal that the Gizmos R Us brand has somewhat weaker brand recognition and recall than Widgets R Us and the products of Gizmos R Us are perceived to be of slightly lower quality
? The market leader is Doohickeys Unlimited, which has the highest market share and strong brand recognition and recall. A royalty database reveals that the DooHickeys
Unlimited brand is licensed for a sales royalty of 3.5%
? The database also noted that the Contraptions & Contrivances, a New Zealand manufacturer, licenses its brand for 4.5%. C&C is the market leader and virtual monopoly supplier in New Zealand. C&C makes occasional sales into the Australian market
Your research has identified the following comparable transactions:
Transaction Target Working Fixed assets Software Customers Brand Goodwill EV implied date capital by
transaction
30/06/2014 Gizmos R Us 864 4320 768 384 960 2304 9600 28/02/2015 Contraptions & Contrivances 1038 8304 2768 1384 0 3806 17300
Assumptions:
? Ignore deferred taxes
? Software is generally deductible for tax purposes in Australia over 10 years.
? Inflation has been about 2.5% for the past 5 years and is assumed to continue at that rate
? Widgets R Us could borrow for working capital at a rate of about 6%
Questions
1. What is the IRR implied by the acquisition of Widgets R Us? Explain how you calculated the IRR
2. What Identifiable Intangible Assets (IIAs) do you identify under IFRS3? What methodology/ies will you use to value each and why?
3. Calculate the value of each IIA. Show your workings
4. Set out the PPA for Widgets R Us
5. Critically evaluate the results of your PPA