REG - ITV PLC - Half-year Report <Origin Href="QuoteRef">ITV.L</Origin> - Part 3
26/07/2017 07:06
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be knock on changes to UK legislation affecting broadcasting and
intellectual property laws. For example, there may be pressure to weaken
obligations to purchase original content made in the UK or to broaden
exceptions from intellectual property protection.
The likelihood or extent of any impact is currently unknown but going forward
we will closely monitor and evaluate any potential areas of risk.
Strategic risks
Strategic risks are those that would impact the successful execution of the
strategy. They are categorised according to risk theme and mapped to ITV's
strategic priorities.
1. Maximising: Maximise audience and revenue share from free-to-air and
VOD business.
2. Growing: Grow international content business.
3. Building: Build a global pay and distribution business
Risk Theme Strategic Risks
The Market ThereisamajordeclineinadvertisingrevenueandITVdoesnotbuildsufficientnon-NAR revenue streams to mitigate the financial impact of thisdecline. 1 2 3
The television market moves significantly towards pay television as a preferred model, negatively impacting ITV's free-to-air revenue. 1 3
A faster than expected shift to VOD or other new technologies, such as internet enabled TVs or online only services, causes a sustained loss of advertising revenue. 1 3
Organisation, Structure and Processes ITV fails to evolve its organisational structure and culture to ensure that it is capable of delivering continued growth from the new businesses or revenue streams and fails to attract, develop and retain key creative, commercial and management talent with the skills required for the ongoing business. 1 2 3
There is significant loss of programme rights or ITV fails to identify and obtain the optimal rights packages. 1 2 3
ITV fails to create and own a sufficient number of hit programmes/formats across its international portfolio of content companies. 1 2 3
ITVfailstoproperlyresource,financially,creativelyandoperationally,thenewgrowth businesses, in particular online and internationalcontent. 1 2 3
ITV remains heavily reliant on legacy systems, which could potentially restrict the ability to grow the business. These systems and processes may not be appropriate for non-advertising revenue or international growth. 1 2 3
Technology A significant high-profile incident or series of events e.g. a system failure,atechnology issue, or a major regulatory breach that causes significant reputational and/or commercialdamage. 1 2 3
ITV fails to ensure appropriate business continuity planning and resilience within its core systems and infrastructure. 1 2 3
Interim Condensed Financial Statements
In this section
Our objective is to make ITV's financial statements less complex, more
relevant to shareholders and provide readers with a clearer understanding of
what drives financial performance of the Group. We have grouped notes under
five key headings: 'Basis of Preparation', 'Results for the Period',
'Operating Assets and Liabilities', 'Capital Structure and Financing Costs'
and 'Other Notes'. The aim of the text in boxes is to provide commentary on
each section, or note, in plain English.
Contents
Primary Statements
Condensed Consolidated Income Statement
Condensed Consolidated Statement of Comprehensive Income
Condensed Consolidated Statement of Financial Position
Condensed Consolidated Statement of Changes in Equity
Condensed Consolidated Statement of Cash Flows
Section 1: Basis of Preparation
Section 2: Results for the Period
2.1 Profit before tax
2.2 Earnings per share
Section 3: Operating Assets and Liabilities
3.1 Acquisitions
3.2 Pensions
Section 4: Capital Structure and Financing Costs
4.1 Net debt
4.2 Borrowings
4.3 Managing market risks: derivative financial instruments
4.4 Fair value hierarchy
Section 5: Other Notes
5.1 Related party transactions
5.2 Contingent liabilities
Responsibility Statement of the Directors in Respect of the Half-Yearly Financial Report
Independent Review Report
Condensed Consolidated Income Statement
For the six month period to 30 June Note 2017 2016
£m £m
Revenue 2.1 1,458 1,503
Operating costs (1,174) (1,173)
Operating profit 284 330
Presented as:
Earnings before interest, tax and amortisation (EBITA) before exceptional items 2.1 395 424
Operating exceptional items (53) (54)
Amortisation and impairment (58) (40)
Operating profit 284 330
Financing income 2 2
Financing costs (25) (23)
Net financing costs (23) (21)
Share of losses of joint ventures and associated undertakings (2) -
Profit before tax 259 309
Taxation (53) (63)
Profit from continuing operations 206 246
Loss after tax for the period from discontinued operation - (3)
Profit for the period 206 243
Profit attributable to:
Owners of the Company from continuing operations 203 243
Non-controlling interests 3 -
Profit for the period from continuing operations 206 243
Earnings per share
Basic earnings per share 2.2 5.1p 6.1p
Diluted earnings per share 2.2 5.1p 6.1p
Earnings per share from continuing operations
Basic earnings per share 2.2 5.1p 6.1p
Diluted earnings per share 2.2 5.1p 6.1p
Condensed Consolidated Statement of Comprehensive Income
For the six month period to 30 June 2017 2016
£m £m
Profit for the period 206 243
Other comprehensive income:
Items that are or may be reclassified to profit or loss
Revaluation of available-for-sale financial assets (1) 3
Net (loss)/gain on cash flow hedges (6) 7
Exchange (loss)/gain on translation of foreign operations (net of hedging) (18) 42
Items that will never be reclassified to profit or loss
Remeasurement (losses)/gains on defined benefit pension schemes (59) 67
Income tax credit/(charge) on items that will never be reclassified 8 (12)
Other comprehensive (loss)/income for the period, net of income tax (76) 107
Total comprehensive income for the period 130 350
Total comprehensive income attributable to:
Owners of the Company 127 350
Non-controlling interests 3 -
Total comprehensive income for the period 130 350
Condensed Consolidated Statement of Financial Position
Note 30 June 31 December 30 June
2017 2016 2016
£m £m £m
Non-current assets
Property, plant and equipment 241 244 240
Intangible assets 1,650 1,624 1,634
Investments in joint ventures, associates and equity investments 74 76 36
Derivative financial instruments 4.3 3 1 1
Distribution rights 35 31 55
Other pension asset 3.2 39 39 -
Deferred tax asset 22 17 -
2,064 2,032 1,966
Current assets
Programme rights and other inventory 485 406 370
Trade and other receivables due within one year 471 526 535
Trade and other receivables due after more than one year 45 39 36
Trade and other receivables 516 565 571
Current tax receivable 10 11 12
Derivative financial instruments 4.3 6 8 14
Assets held for sale - - 8
Cash and cash equivalents 4.1 123 561 181
1,140 1,551 1,156
Current liabilities
Borrowings 4.1 (243) (165) (231)
Derivative financial instruments 4.3 (1) (3) (6)
Trade and other payables due within one year (862) (960) (775)
Trade payables due after more than one year (48) (57) (57)
Trade and other payables (910) (1,017) (832)
Current tax liabilities (65) (76) (94)
Provisions (19) (19) (27)
Liabilities held for sale - - (2)
(1,238) (1,280) (1,192)
Net current (liabilities)/assets (98) 271 (36)
Non-current liabilities
Borrowings 4.1 (969) (1,035) (746)
Derivative financial instruments 4.3 (1) (9) -
Defined benefit pension deficit 3.2 (382) (367) (64)
Deferred tax liabilities (67) (70) (97)
Other payables (66) (63) (105)
Provisions (4) (4) (4)
(1,489) (1,548) (1,016)
Net assets 477 755 914
Attributable to equity shareholders of the parent company
Share capital 403 403 403
Share premium 174 174 174
Merger and other reserves 220 221 221
Translation reserve 55 79 84
Available-for-sale reserve 6 7 9
Retained earnings (418) (162) (8)
Total equity attributable to equity shareholders of the parent company 440 722 883
Non-controlling interests 37 33 31
Total equity 477 755 914
Ian Griffiths
Chief Operating Officer and Group Finance Director
Condensed Consolidated Statement of Changes in Equity
Attributable to equity shareholders of the parent company
Share Share Merger Translation Available-for-sale Retained Total Non- Total
capital premium and other reserve reserve earnings £m controlling equity
£m £m reserves £m £m £m interests £m
£m £m
Balance at 1 January 2017 403 174 221 79 7 (162) 722 33 755
Total comprehensive income for the period
Profit for the period - - - - - 203 203 3 206
Other comprehensive income/(loss)
Revaluation of available-for-salefinancial assets - - - - (1) - (1) - (1)
Net loss on cash flow hedges - - - (6) - - (6) - (6)
Exchange differences on translation of foreign operations (net of hedging) - - - (18) - - (18) - (18)
Disposal of subsidiary - - 2 - - (2) - - -
Remeasurement loss on defined benefit pension schemes - - - - - (59) (59) - (59)
Income tax credit on other comprehensive income - - - - - 8 8 - 8
Total other comprehensive income/(loss) - - 2 (24) (1) (53) (76) - (76)
Total comprehensive income/(loss) for - - 2 (24) (1) 150 127 3 130
the period
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Equity dividends - - - - - (394) (394) (2) (396)
Movements due to share-based compensation - - - - - 6 6 - 6
Purchase of own shares via employees' benefit trust - - - - - (18) (18) - (18)
Total transactions with owners - - - - - (406) (406) (2) (408)
Changes in non-controlling interests - - (3) - - - (3) 3 -
Balance at 30 June 2017 403 174 220 55 6 (418) 440 37 477
Attributable to equity shareholders of the parent company
Share Share Merger Translation Available-for-sale Retained Total Non- Total
capital premium and other reserve reserve earnings £m controlling equity
£m £m reserves £m £m £m interests £m
£m £m
Balance at 1 January 2016 403 174 221 35 6 275 1,114 33 1,147
Total comprehensive income for the period
Profit for the period - - - - - 243 243 - 243
Other comprehensive income/(loss)
Revaluation of available-for-sale financial assets - - - - 3 - 3 - 3
Net gain on cash flow hedges - - - 7 - - 7 - 7
Exchange differences on translation of foreign operations (net of hedging) - - - 42 - - 42 - 42
Remeasurement gains on defined benefit pension schemes - - - - - 67 67 - 67
Income tax charge on other comprehensive income - - - - - (12) (12) - (12)
Total other comprehensive income - - - 49 3 55 107 - 107
Total comprehensive income for the period - - - 49 3 298 350 - 350
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Equity dividends - - - - - (566) (566) (2) (568)
Movements due to share-based compensation - - - - - 7 7 - 7
Tax on items taken directly to equity - - - - - (2) (2) - (2)
Purchase of own shares via employees' benefit trust - - - - - (20) (20) - (20)
Total transactions with owners - - - - - (581) (581) (2) (583)
Balance at 30 June 2016 403 174 221 84 9 (8) 883 31 914
Condensed Consolidated Statement of Cash Flows
For the six month period to 30 June Note £m 2017 £m 2016
£m £m
Cash flows from operating activities
Profit before tax 2.1 259 309
Share of losses of joint ventures and associated undertakings 2 -
Net financing costs 23 21
Operating exceptional items 53 54
Depreciation of property, plant and equipment 17 15
Amortisation and impairment 58 40
Share-based compensation and pension service costs 9 7
Adjustments to profit 162 137
Increase in programme rights and other inventory,and distribution rights (80) (20)
Decrease/(increase) in receivables 33 (40)
Decrease in payables (68) (7)
Movement in working capital (115) (67)
Cash generated from operations before exceptional items 306 379
Cash flow relating to operating exceptional items:
Operating exceptional items (53) (54)
(Decrease)/increase in exceptional payables (70) 17
Decrease in exceptional prepayments and other receivables 20 29
Cash outflow from exceptional items (103) (8)
Operating cash flow from discontinued operations - (5)
Cash generated from operations 203 366
Defined benefit pension deficit funding 3.2 (47) (47)
Interest received 21 9
Interest paid on bank and other loans (41) (15)
Net taxation paid (65) (33)
(132) (86)
Net cash inflow from operating activities 71 280
Cash flows from investing activities
Acquisition of subsidiary undertakings, net of cash acquired 3.1 (24) (97)
Acquisition of property, plant and equipment (14) (13)
Acquisition of intangible assets (12) (10)
Acquisition of investments (15) (3)
Loans granted to associates and joint ventures (2) (3)
Net cash outflow from investing activities (67) (126)
Cash flows from financing activities
Bank and other loans - amounts repaid 4.1 (341) (505)
Bank and other loans - amounts raised 4.1 320 815
Capital element of finance lease payments (4) (4)
Equity dividends paid (394) (566)
Dividend paid to minority interest (2) (2)
Purchase of own shares via employees' benefit trust (18) (20)
Net cash outflow from financing activities (439) (282)
Net decrease in cash and cash equivalents (435) (128)
Cash and cash equivalents at 1 January 4.1 561 294
Effects of exchange rate changes and fair value movements (3) 15
Cash and cash equivalents at 30 June 4.1 123 181
Notes to the Interim Condensed Financial Statements
Section 1: Basis of Preparation
In this section
This section lays out the accounting conventions and accounting policies used
in preparing these condensed consolidated interim financial statements.
These condensed consolidated interim financial statements for the six months
ended 30 June 2017 have been prepared in accordance with the Disclosure and
Transparency Rules of the Financial Conduct Authority and with IAS 34,
'Interim financial reporting' as adopted by the European Union.
These condensed consolidated interim financial statements should be read in
conjunction with the annual financial statements for the year ended 31
December 2016, which were prepared in accordance with IFRS as adopted by the
European Union.
The preparation of interim financial statements requires management to make
judgements, estimates and assumptions that affect the application of
accounting policies and the reported amount of assets and liabilities, income
and expenses. Actual results may differ from these estimates. Except as
described below, in preparing these condensed consolidated interim financial
statements, the significant judgements made by management in applying the
Group accounting policies and the key sources of estimation uncertainty were
the same as those applied to the consolidated financial statements as at and
for the year ended 31 December 2016.
Revenues are impacted by underlying economic conditions, the cyclical demand
for advertising, seasonality of programme sales, significant licensing deals
and the timing of delivery of ITV Studios' programmes. Major events, including
sporting events, will impact the seasonality of schedule costs and the mix of
programme spend between sport and other genres, especially drama and
entertainment. Other than this, there is no significant seasonality or
cyclicality affecting the interim results of the operations.
For the purposes of interim reporting, the defined benefit pension schemes'
key assumptions and asset values have been reviewed to assess whether material
net actuarial gains and losses have occurred during the period (see note
3.2).
During the six months ended 30 June 2017, management also reassessed its
estimates in respect of provisions and considered the recoverable amount of
goodwill and other intangible assets. No impairment of goodwill or other
intangible assets was identified.
These interim financial statements and the comparative figures are not
statutory accounts. The statutory accounts for the year ended 31 December 2016
have been reported on by the Company's auditors and delivered to the Registrar
of Companies. The auditors' report was: (i) unqualified; (ii) did not include
a reference to any matters to which the auditors drew attention by way of
emphasis without qualifying their report; and (iii) did not contain a
statement under section 498(2) or (3) of the Companies Act 2006.
Going concern
At 30 June 2017 the Group was in a net debt position. The Group's strong
balance sheet and continued generation of significant free cash flows has
enabled further investment as well as the payment of a special dividend. See
section 4 for details on capital structure and financing.
The Group continues to review forecasts of the television advertising market
to determine the impact on ITV's liquidity position. The Group's forecasts and
projections, taking account of reasonably possible changes in trading
performance, show that the Group will be able to operate within the level of
its current available funding.
The Group also continues to focus on development of the non-advertising
business, and evaluates the impact of further investment against the strategy
and cash headroom of the business.
After making enquiries, the Directors have a reasonable expectation that the
Group has adequate resources to continue in operation for at least twelve
months from the date of this report. Accordingly, the Group continues to adopt
the going concern basis in preparing its consolidated financial statements.
New or amended EU endorsed accounting standards
Details of new or revised accounting standards, interpretations or amendments
which are effective for periods beginning on or after 1 January 2017 and which
are considered to have an impact on the Group can be found in the annual
financial statements for the year ended 31 December 2016.
IFRS 15 Revenue from Contracts with Customers is effective 1 January 2018.
IFRS 15 will require the Group to identify distinct promises in contracts with
customers that qualify as 'performance obligations'. The price receivable from
customers must then be allocated between the performance obligations
identified.
An initial assessment of the impact on the Group's performance has been
performed on material revenue streams. The impact is not expected to be
material for either Broadcast & Online or ITV Studios revenues.
The Directors anticipate adopting IFRS 15 on 1 January 2018. When IFRS 15 is
adopted it can be applied either on a fully retrospective basis, requiring the
restatement of the comparative periods presented in the financial statements,
or with the cumulative retrospective impact of the standard applied as an
adjustment to equity on the date of adoption. The Directors currently intend
to apply the fully retrospective method.
IFRS 9 Financial Instruments is also effective 1 January 2018. Based on the
initial assessment of the impact, the Directors are currently not expecting
the application to significantly impact the Group's current accounting or
hedging activities.
IFRS 16 Leases is effective 1 January 2019 and has not yet been endorsed by
the EU. IFRS 16 will change lease accounting for lessees under operating
leases. Such agreements will require recognition of an asset representing the
right to use the leased item and a liability for future lease payments. Lease
costs (such as property rent) will be recognised in the form of depreciation
and interest, rather than operating cost. The detailed assessment of impact on
the Group's performance is ongoing, the adoption is likely to have a material
impact on the presentation of the Group's assets and liabilities.
Section 2: Results for the Period
In this section
This section focuses on the results and performance of the Group. In the
following section you will find disclosures explaining the Group's results for
the period, segmental information and earnings per share.
2.1 Profit before tax
Keeping it simple
Adjusted earnings before interest, tax and amortisation (adjusted EBITA) is
the Group's key profit indicator. This reflects the way the business is
managed and how the Directors assess the performance of the Group.
The Group has two divisions, or operating segments, namely 'Broadcast &
Online' and 'ITV Studios', the performance of which are managed and assessed
separately by management. This section also shows each division's contribution
to total revenue and adjusted EBITA.
Segmental information
Operating segments, which have not been aggregated, are determined in a manner
that is consistent with how the business is managed and reported to the Board
of Directors. The Board is regarded as the chief operating decision maker.
The Board considers the business primarily from an operating activity
perspective. The reportable segments for the periods ended 30 June 2017 and 30
June 2016 are therefore Broadcast & Online and ITV Studios, the results of
which are outlined in the following tables:
For the six month period to 30 June Broadcast ITV Studios Consolidated
& Online 2017 2017
2017 £m £m
£m
Total segment revenue 1,000 697 1,697
Intersegment revenue - (239) (239)
Revenue from external customers 1,000 458 1,458
Adjusted EBITA** 293 110 403
For the six month period to 30 June Broadcast ITV Studios Consolidated
& Online 2016 2016
2016 £m £m
£m
Total segment revenue 1,065 651 1,716
Intersegment revenue - (209) (209)
Revenue from external customers including discontinued operations 1,065 442 1,507
Less: Discontinued operations* (4) - (4)
Revenue from external customers 1,061 442 1,503
Adjusted EBITA including discontinued operations 314 121 435
Adjusted EBITA from discontinued operations 3 - 3
Adjusted EBITA** 317 121 438
* Following the purchase of the 100% controlling interest in UTV Limited in
February 2016, management concluded that the best prospect of delivering a
strong and sustainable Irish broadcaster was to bring UTV Ireland under common
ownership with TV3, and subsequently sold UTV Ireland Limited to Virgin Media,
owner of TV3, on 11 July 2016 for E10 million.
** Adjusted EBITA is before exceptional items and includes the benefit of
production tax credits. It is shown after the elimination of intersegment
revenue and costs. This measure represents the continuing operations.
Adjusted EBITA
A reconciliation from adjusted EBITA to profit before tax is provided as
follows:
For the six month period to 30 June 2017 2016
£m £m
Adjusted EBITA 403 438
Production tax credits (8) (14)
EBITA before exceptional items from continuing operations 395 424
Operating exceptional items (53) (54)
Amortisation and impairment (58) (40)
Net financing costs (23) (21)
Share of losses of joint ventures and associated undertakings (2) -
Profit before tax from continuing operations 259 309
A reconciliation of Profit before tax to Adjusted Profit before tax is
included in the Finance and Performance Review.
2.2 Earnings per share
Keeping it simple
Earnings per share ('EPS') is the amount of post-tax profit attributable to
each share.
Basic EPS is calculated on the Group profit for the period attributable to
equity shareholders of £203 million (2016: £246 million) divided by 4,010
million (2016: 4,011 million) being the weighted average number of shares in
issue during the period.
Diluted EPS reflects any commitments made by the Group to issue shares in the
future and so it includes the impact of share options.
Adjusted EPS is presented in order to show the business performance of the
Group in a consistent manner and reflect how the business is managed and
measured on a day-to-day basis. Adjusted EPS reflects the impact of operating
and non-operating exceptional items on Basic EPS. Other items excluded from
Adjusted EPS include amortisation and impairment; net financing cost
adjustments and the tax adjustments relating to these items. Each of these
adjustments are explained in detail in the section below.
The calculation of Basic EPS and Adjusted EPS, together with the diluted
impact on each, is set out below:
Earnings per share
For the six month period to 30 June 2017 2016
£m £m
Profit for the period attributable to equity shareholders of ITV plc 203 243
Less: Loss for the period from discontinued operations - (3)
Profit for the period attributable to equity shareholders of ITV plc from continuing operations 203 246
Weighted average number of ordinary shares in issue - million 4,010 4,011
Earnings per ordinary share and from continuing operations 5.1p 6.1p
Loss per ordinary share from discontinued operations - -
Diluted earnings per share
For the six month period to 30 June 2017 2016
£m £m
Profit for the period attributable to equity shareholders of ITV plc from continuing operations 203 246
Weighted average number of ordinary shares in issue - million 4,010 4,011
Dilution due to share options 9 20
Total weighted average number of ordinary shares in issue - million 4,019 4,031
Diluted earnings per ordinary share and from continuing operations 5.1p 6.1p
Diluted loss per ordinary share from discontinued operations - -
Adjusted earnings per share
For the six month period to 30 June Ref. 2017 2016
£m £m
Profit for the period attributable to equity shareholders of ITV plc 203 243
Exceptional items (net of tax) A 50 53
Less: Loss after tax for the period from discontinued operations - (3)
Profit for the period before exceptional items from continuing operations 253 299
Amortisation and impairment B 48 31
Adjustments to net financing costs C 5 9
Other tax adjustments 1 1
Adjusted profit from continuing operations 307 340
Total weighted average number of ordinary shares in issue - million 4,010 4,011
Adjusted earnings per ordinary share and from continuing operations 7.7p 8.5p
Adjusted loss per ordinary share from discontinued operations - -
Diluted adjusted earnings per share
For the six month period to 30 June 2017 2016
£m £m
Adjusted profit from continuing operations 307 340
Weighted average number of ordinary shares in issue - million 4,010 4,011
Dilution due to share options 9 20
Total weighted average number of ordinary shares in issue - million 4,019 4,031
Diluted adjusted earnings per ordinary share and from continuing operations 7.6p 8.4p
Diluted adjusted loss per ordinary share from discontinued operations - -
The rationale for determining the adjustments to profit is disclosed in the 31
December 2016 Annual Report and has not changed during the period. Details of
the adjustments to earnings are as follows:
A. Exceptional items (net of tax) £50 million (2016: £53 million)
Operating and non-operating exceptional items of £53 million (2016: £54
million), net of a tax credit of £3 million (2016: £1 million) relate to £50
million of acquisition-related expenses, primarily performance-based,
employment linked consideration and other items including restructuring costs
and property project costs of £3 million.
B. Amortisation and impairment of £48 million (2016: £31 million)
Calculated as total amortisation and impairment of assets acquired through
business combinations and investments of £55 million (2016: £37 million),
which excludes amortisation and impairment of software licenses and
development of £3 million (2016: £3 million), net of a related tax credit of
£10 million (2016: £10 million). This is then adjusted to recognise a £3
million cash tax benefit arising from goodwill on US acquisitions, which for
tax purposes is amortised over a 15-year period (2016: £4 million).
C. Adjustments to net financing costs £5 million (2016: £9 million)
Net financing costs are adjusted for mark-to-market movements on derivative
instruments, foreign exchange and imputed pension interest charges of £6
million (2016: £11 million), net of a related tax credit of £1 million (2016:
£2 million).
Dividends
Equity dividends are derived from the distributable reserves of the ITV plc
Company and not from the consolidated Group, and therefore the consolidated
retained loss presented on the condensed consolidated balance sheet does not
represent a block to our dividend policy. The Board is committed to a
long-term sustainable dividend policy and for ordinary dividends to grow
broadly in line with earnings, targeting dividend cover of around 2x adjusted
earnings per share over the medium term.
The Board has declared an interim dividend of 2.52p, an increase of 5%,
reflecting our confidence in the underlying strength of the business.
Section 3: Operating Assets and Liabilities
In this section
This section shows the assets used to generate the Group's trading performance
and the liabilities incurred as a result. In the following section there are
notes covering acquisitions and pensions.
Liabilities relating to the Group's financing activities are addressed in
section 4.
3.1 Acquisitions
Keeping it simple
The following section outlines what the Group has acquired in the period.
Most of the deals are structured so that a large part of the payment made to
the sellers ('consideration') is determined based on future performance. This
is done so that the Group can both align incentives for growth, while reducing
risk so that total consideration reflects actual, not expected performance.
IFRS accounting standards require some of this consideration to be included in
the purchase price used in determining goodwill ('contingent consideration').
Examples of contingent consideration include top-up payments and recoupable
performance adjustments. Any remaining consideration is required to be
recognised as a liability or expense outside of acquisition accounting (put
option liabilities and employment-linked contingent payments known as
'earnout' payments).
The Group considers the income statement impact of all consideration to be
capital in nature and therefore excludes it from adjusted profit. Therefore,
for each acquisition below, the distinction between the types of consideration
has been explained in detail.
Acquisitions
During the period, the Group made payments totalling £33 million for three
acquisitions: Tetra Media Studios SAS, World Productions Limited and Elk
Production AB, all of which have been included in the results of the ITV
Studios operating segment. The Group also has a present right to convert its
75% preference shareholding in Tomorrow ITV Studios LLC into 75% common shares
for £nil consideration.
The businesses fit with the strategy of strengthening the Group's existing
position as a producer for major television networks in the UK and Europe.
Key terms:
Tetra Media Studios SAS
On 28 February 2017, the Group purchased 65.04% of the share capital of Tetra
Media Studios SAS, a French television production group which specialises in
drama, including flagship crime series Profilage, now in its seventh series,
and political crime thriller Les Hommes de l'Ombre. The cash consideration of
£20 million (E22.9 million) was paid on acquisition. A put and call option has
been granted over the remaining 34.96% of share capital exercisable over the
next seven years. In addition, a further payment, capped at E2 million, is
payable in two years. The total maximum consideration is capped at E50
million. All future payments are dependent on future performance of the
business and linked to ongoing employment.
World Productions Limited
On 30 April 2017, the Group purchased 92% of the share capital of World
Productions Limited, a company which specialises in producing drama series
with titles including Line of Duty, an award-winning British police crime
drama, and Born to Kill, a British thriller television mini-series. The
initial cash consideration of £8 million was paid on acquisition. A put and
call option is held over the remaining 8% share capital, exercisable over the
next seven years. The total future payments are capped at £4 million and are
dependent on future performance of the business and linked to ongoing
employment.
Elk Production AB
On 21 June 2017, the Group acquired 96% of the share capital of Elk Production
AB for cash consideration of £5 million (SEK 51.9 million)
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