Chapters
Annual Report 2018

4. Acquisitions of Subsidiaries, Associates and Non-Controlling Interests

Accounting Policy

The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired, and liabilities and contingent liabilities assumed, in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. Any adjustments to the purchase price allocation are made within the one-year measurement period in accordance with IFRS 3. On an acquisition-by-acquisition basis, the Group recognizes any non-controlling interest in the acquired subsidiary either at fair value or at the non-controlling interest’s proportionate share of the acquired subsidiary’s net assets.

The excess of the consideration transferred, the amount of any non-controlling interest in the acquired subsidiary and the acquisition-date fair value of any previous equity interest in the acquired subsidiary over the fair value of the Group’s share of the identifiable net assets acquired are recognized as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated Income Statement.

GrandVision applies the anticipated acquisition method where it has the right and the obligation to purchase any remaining non-controlling interest (so-called put/call arrangements). Under the anticipated acquisition method the interests of the non-controlling shareholder are presented as already owned, even though legally they are still non-controlling interests. The recognition of the related financial liability implies that the interests subject to the purchase are deemed to have been acquired already. The initial measurement of the fair value of the financial liability recognized by the Group forms part of the contingent consideration for the acquisition.

Any contingent consideration to be transferred by the Group is recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability are recognized in accordance with IFRS 9 in the consolidated Income Statement. Contingent considerations qualify for the level 3 fair value category. See note 3.3 for a description of the different levels of valuation categories. The valuation techniques and fair value levels are consistent compared with prior year.

Acquisition-related expenses are taken into the consolidated Income Statement at the moment they are incurred.

Significant Accounting Estimates and Judgments

When a company is acquired, the fair value of the intangible assets is determined. The determination of the value at the time of acquisition and estimated useful life is subject to uncertainty. Useful life is estimated using past experience and the useful life period, as is broadly accepted in the retail sector.

For the Group, common intangible assets identified during acquisition are trademarks and customer databases. The following assumptions are the most sensitive when estimating the value:

Intangible Asset

Key assumptions

Trademark

Royalty rate, revenue growth and discount rate

Customer Database

Churn rate, EBITA growth and discount rate

The following acquisitions and adjustments to the purchase price allocation were done in 2018

Store acquisitions

During 2018 the Group acquired 46 stores across all segments, but mainly in the G4 segment. With these acquisitions the Group further strengthened its market position within the respective regions. After the initial allocation of the consideration transferred for the acquisitions of the assets, liabilities and contingent liabilities in 2018, an amount of €4,458 was identified as provisional goodwill. The goodwill is attributable to the expected synergies following the integration of the acquired businesses into our existing organization. The goodwill mainly comprises the skilled employees, the locations of the acquired stores and other items, which cannot be recognized as separately identifiable assets.

Adjustments to purchase price allocation

The Group finalized the purchase price allocation for acquisitions done in 2017. This did not result in a change in the value of recognized goodwill relating to stores.

The finalization of the purchase price allocation for Visilab S.A. and Tesco Opticians resulted in an increase in the value of recognized goodwill of €1,670 (CHF 1,931) and €647 (GBP 578) respectively, resulting from the reassessment of the consideration to be paid and the fair value of net assets acquired.

Visilab S.A.

At 31 December 2018, contingent consideration to the value of €19,630 (CHF 22,121) (31 December 2017: €38,339 (CHF 44,864)) relates to the Group's obligation to increase its shareholding in Visilab S.A. from 70% to 79% in 2019 in terms of the purchase agreement. This represents the last step of the increase of the Group's shareholding in Visilab S.A. The contingent consideration is presented within Trade and Other Payables (see note 29).

The contingent consideration is calculated using an EBITDA multiple based on the Group's best estimate of the achievement of agreed business targets by Visilab S.A., adjusted for the time value of money and expected dividend payments.

In 2018, the contingent consideration increased with €2,477 (CHF 2,825) and relates to an update of the Group's estimate of agreed business targets by Visilab S.A., expected dividend payments and the progression of time value of money. Further, the contingent consideration increased with €978 due to the effect of foreign currency exchange differences. Besides the effect of time value of money and foreign currency exchange differences which are recognized in Financial costs, the update of the Group's estimates of EBITDA and expected dividend payments were recognized as a purchase price allocation adjustment.

In July 2018, an amount of €22,164 (CHF 25,568) was paid which related to the increase of the Group's shareholding in Visilab S.A. from 60% to 70%.

Tesco Opticians

At 31 December 2017, the Group recognized contingent consideration to the value of €5,636 (GBP 5,000), relating to its obligation to pay an additional amount in 2018 based on the achievement of agreed business targets of Tesco Opticians. In 2018, based on the realization of certain agreed business targets, the contingent consideration decreased and an amount of €1,624 (GBP 1,458) was recognized as a gain in the consolidated Income Statement. Subsequently, the Group mostly settled the contingent consideration.

Details of the net assets acquired, related consideration and adjustments to purchase price allocation are set out below:

in thousands of EUR

Notes

Store acquisitions

Adjustments to purchase price allocation

Total

Property, plant and equipment

11

2,048

-

2,048

Other intangibles assets

13

7,741

-

7,741

Deferred income tax assets

10

-

1,465

1,465

Other non-current assets

81

-

81

Inventories

381

- 493

- 112

Trade and other receivables

474

-

474

Cash and cash equivalents

26

-

26

Deferred income tax liabilities

10

- 992

-

- 992

Non-current borrowings

23

- 426

-

- 426

Trade and other payables

- 346

163

- 183

Current borrowings

- 6

-

- 6

Total identifiable net assets and liabilities at fair value

8,981

1,135

10,116

Consideration paid in cash and cash equivalents

13,439

317

13,756

Cash and cash equivalents and bank overdrafts at acquired subsidiary

- 20

-

- 20

Outflow of cash and cash equivalents net of cash acquired

13,419

317

13,736

Consideration paid in cash and cash equivalents

13,439

317

13,756

Consideration to be transferred

-

3,135

3,135

Total consideration transferred or to be transferred

13,439

3,452

16,891

Minus: Identifiable net assets and liabilities at fair value

- 8,981

- 1,135

- 10,116

Goodwill

12

4,458

2,317

6,775

The acquisitions in 2018 contributed the following in revenue and net result for the Group:

in thousands of EUR

Store acquisitions

Revenue

7,444

Net result

1,468

Had the acquisitions in 2018 been consolidated for the full year, revenue and net result would be:

in thousands of EUR

Store acquisitions

Revenue

19,881

Net result

3,347