REG - Sainsbury(J) PLC - Final Results <Origin Href="QuoteRef">SBRY.L</Origin> - Part 4
03/05/2017 07:06
- Part 4: For the preceding part double click ID:nRSC9748Dc
2.30 2.15
Future pension increases 2.00 - 3.15 1.90 - 3.00
12 Acquisition of Home Retail Group plc
On 2 September 2016, the Group acquired 100 per cent of the issued share capital of Home Retail Group plc ("HRG"), a listed
company based in the United Kingdom, by means of a Scheme of Arrangement under Part 26 of the Act for a consideration of
£1,093 million. The full analysis of the consideration is shown below:
Form of consideration Consideration fair value at acquisition date£m
Cash of £447 million (being 55p per existing share); fair value is based on Home Retail Group plc's share capital of 813,445,001 shares in existence as at the acquisition date. 447
£3 million in relation to the contractual requirement to settle certain existing HRG share scheme awards and options. 3
261 million new J Sainsbury plc shares of 28p nominal value each were issued (being 0.321 new J Sainsbury plc shares per existing Home Retail Group plc share); fair value of the consideration is based on a J Sainsbury plc share price of £2.4610 as of 2 September 2016. 643
Total 1,093
Home Retail Group's activities mainly comprise general merchandise related retail. The acquisition is expected to
accelerate Sainsbury's growth strategy in General Merchandise & Clothing retail as well as its online presence. The
combination brings together two of the UK's leading retail businesses with complementary product offers through an
integrated, multi-channel proposition.
None of the goodwill recognised of £58 million is expected to be deductible for income tax purposes. This was calculated as
the difference between the fair value of consideration paid and the fair value of net assets acquired as set out in the
following table.
The provisional assets and liabilities recognised as a result of the acquisition are as follows:
Fair value of net assets acquired (provisional) £m
Fixed assets 262
Intangible assets 322
Inventories 810
Trade and other receivables 146
Deferred tax assets 45
Amounts due from Financial Services customers (the "loan book") 615
Other financial assets1 59
Cash and cash equivalents2 548
Total assets acquired 2,807
Provisions (104)
Trade and other payables2 (1,214)
Defined benefit obligation (454)
Total liabilities acquired (1,772)
Net identifiable assets acquired at fair value 1,035
Goodwill arising on acquisition 58
Purchase consideration transferred 1,093
1 Other financial assets includes £9 million of J Sainsbury plc shares (converted from Home Retail Group plc own
shares at the point of acquisition). On consolidation these become J Sainsbury plc own shares in the consolidated statement
of changes in equity.
2 Cash and cash equivalents and trade and other payables acquired are both presented gross of the capital return of
£226 million.
In accordance with IFRS 3 'Business Combinations', the acquisition accounting will be finalised within 12 months of the
acquisition date of 2 September 2016.
(a) Intangible assets
Intangible assets include a brand of £179 million relating to the Argos brand name. This reflects its fair value at the
acquisition date and is estimated to have a useful economic life of ten years.
(b) Trade and other receivables
Trade and other receivables include £40 million of trade receivables, against which a bad debt provision of £(1) million is
held. Also included are prepayments and accrued income of £29 million, and other debtors of £78 million.
(c) Amounts due from Financial Services customers (the "loan book")
The loan book fair value of £615 million includes a fair value increase of £20 million and a provision for impairment of
£(66) million.
(d) Revenue and profit contribution
From the date of acquisition, Home Retail Group has contributed £2,661 million of revenue excluding VAT, £77 million of
underlying profit before tax and a statutory profit before tax of £54 million to the Group. If the acquisition date had
been on the first day of the financial year, Group revenues for the period would have been £28,013 million, Group
underlying profit before tax would have been £563 million and Group profit before tax would have been £361 million. These
amounts have been calculated using the Group's accounting policies. The information is provided for illustrative purposes
only and is not indicative of the results of the combined Group that would have occurred had the purchase actually been
made at the beginning of the year, or indicative of the future results of the combined Group.
(e) Acquisition-related costs
Acquisition-related costs (included in administrative expenses and recognised outside of underlying profit) amount to £22
million in the current year (12 March 2016: £12 million) (see note 3). In addition £3 million of costs relating to the
issuance of J Sainsbury plc shares have been recognised directly within equity.
(f) Capital return
Prior to the acquisition of Home Retail Group plc, it was announced that Home Retail Group plc shareholders would be
entitled to a £226 million capital return comprising the following:
· 25.0 pence per share, reflecting the £200 million return to shareholders in respect of the sale of Homebase by Home
Retail Group plc on 29 February 2016; and
· 2.8 pence per share (totalling £26 million) in lieu of a final dividend in respect of Home Retail Group plc's
financial year ended 27 February 2016.
This was recorded as a liability in the net assets acquired above within trade and other payables. The full amount was paid
on 12 September 2016.
(g) Cash impact of acquisition
£m
Cash consideration (447)
Cash acquired 548
Acquisition of subsidiaries, net of cash acquired (per consolidated cash flow statement) 101
(h) Hindsight adjustments
The provisional fair values acquired are different from those reported at the half-year due to hindsight adjustments as
permitted under IFRS 3 "Business Combinations". The goodwill arising as a result of the acquisition has therefore increased
from £18 million, as reported at the half-year, to £58 million.
12 Supplier arrangements
Supplier incentives, rebates and discounts, collectively known as 'supplier arrangements', represent a material deduction
to cost of sales and administrative expenses and directly affect the Group's reported margin. The arrangements can be
complex, with amounts spanning multiple products over different time periods, and there can be multiple triggers and
discounts. The accrued value at the reporting date is included in trade receivables or trade payables, depending on the
right of offset.The four key types are as follows:
· Discounts and supplier incentives - these represent the majority of all supplier arrangements and are linked to
individual unit sales. The incentive is typically based on an agreed sum per item sold on promotion for a period and
therefore is considered part of the purchase price for that product.
· Fixed amounts - these are agreed with suppliers primarily to support in-store activity including promotions, such as
utilising specific space. These involve a degree of judgement and estimation in ensuring the appropriate cut-off of
arrangements for fixed amounts which span period-end. These require judgement to determine when the terms of the
arrangement are satisfied and that amounts are recognised in the correct period.
13 Supplier arrangements (continued)
· Supplier rebates - these are typically agreed on an annual basis, aligned with the Group's financial year. The
rebate amount is linked to pre-agreed targets such as sales volumes and requires estimates of the amount earned up to the
balance sheet date, for each relevant supplier contract. Where agreements span a financial period-end, estimations are
required of projected turnover and judgement may also need to be applied to determine the rebate level earned as agreements
may involve multiple tiers. In order to minimise any risk arising from estimation, supplier confirmations are obtained to
agree the value to be recognised at year-end, prior to it being invoiced. Rebates represent the smallest element of the
Group's supplier arrangements and by aligning the agreements to the Group's financial year, where possible, the judgements
required are minimised.
· Marketing and advertising income - income which is directly linked to the cost of producing the Argos catalogue is
recognised once agreed with the supplier and when the catalogue is made available to the Group which is the point at which
the catalogue costs are recognised.
Of the above categories, fixed amounts, supplier rebates and marketing and advertising income involve a level of judgement
and estimation. The amounts recognised in the income statement for these three categories in the financial year are as
follows:
2017 2016
£m £m
Fixed amounts (within cost of sales) 204 302
Supplier rebates (within cost of sales) 87 69
Marketing and advertising income (included within adminstrative expenses) 52 -
Total supplier arrangements 343 371
Of the above amounts, the following was outstanding and held on the balance sheet at year-end:
2017 2016
£m £m
Within current trade receivables:
Supplier arrangements due 29 6
Within current trade payables:
Supplier arrangements due 25 39
Accrued supplier arrangements 13 25
Alternative performance measures
In response to the Guidelines on Alternative Performance Measures ("APMs") issued by the European Securities and Markets
Authority ("ESMA"), we have provided additional information on the APMs used by the Group. The Directors use the below APMs
as they are critical to understanding the financial performance and financial health of the Group. As they are not defined
by International Financial Reporting Standards, they may not be directly comparable with other companies who use similar
measures. All APMs relate to the current period's results and comparative periods where provided.
APM Definition Reconciliation
Cash flows and net debt
Cash flow items in Financial Review To help the reader understand cash flows of the business a summarised cash flow statement is included within the financial review. As part of this a number of line items have been combined. The cash flow in note 4 of the accounts includes a reference to show what has been combined in these line items. Ref 2017 2016 £m £m Net interest A (108) (102) Property related including strategic capital expenditure B 28 155 HRG acquisition and AFS loan book refinancing C 457 -
Repayment of borrowings D (211) (363) Other E (10) (31)
Free cash flow Net cash generated from retail operations, adjusted for exceptional pension contributions, after cash capital expenditure but before strategic capital expenditure. Reconciliation of free cash flow 2017 2016 £m £m Cash generated from retail operations 929 1,024 Add back: exceptional pension contribution 199 125 Net interest paid
(108) (102) Corporation tax (87) (124) Retail purchase of property, plant and equipment and intangibles (622) (593) Retail purchase of intangible assets (58) (34) Add
back: Strategic capital expenditure 92 - Free cash flow 345 296
Operating cash flow Cash generated from operations after changes in working capital. A reconciliation is provided in note 4.
Retail operating cash flow Retail cash generated from operations after changes in working capital. A reconciliation of retail operating cash flow is provided in note 4.
Core retail capital expenditure Capital expenditure excludes Sainsbury's Bank, Argos exceptional capital expenditure, proceeds from sale and leasebacks and strategic capital expenditure. A calculation of this is provided in the financial review on page 23.
Net debt Net debt excludes the net debt of Financial Services and is calculated as: current available for sale assets + current net derivatives + net cash and cash equivalents + loans + non-current finance lease obligations + non-current net derivatives. A reconciliation of net debt is provided in note 10.
Gearing Net debt divided by net assets. Net assets as per the Group balance sheet.
Repayment of borrowings
D
(211)
(363)
Other
E
(10)
(31)
Free cash flow
Net cash generated from retail operations, adjusted for exceptional pension contributions, after cash capital expenditure
but before strategic capital expenditure.
Reconciliation of free cash flow 2017 2016
£m £m
Cash generated from retail operations 929 1,024
Add back: exceptional pension contribution 199 125
Net interest paid (108) (102)
Corporation tax (87) (124)
Retail purchase of property, plant and equipment and intangibles (622) (593)
Retail purchase of intangible assets (58) (34)
Add back: Strategic capital expenditure 92 -
Free cash flow 345 296
Operating cash flow
Cash generated from operations after changes in working capital.
A reconciliation is provided in note 4.
Retail operating cash flow
Retail cash generated from operations after changes in working capital.
A reconciliation of retail operating cash flow is provided in note 4.
Core retail capital expenditure
Capital expenditure excludes Sainsbury's Bank, Argos exceptional capital expenditure, proceeds from sale and leasebacks and
strategic capital expenditure.
A calculation of this is provided in the financial review on page 23.
Net debt
Net debt excludes the net debt of Financial Services and is calculated as: current available for sale assets + current net
derivatives + net cash and cash equivalents + loans + non-current finance lease obligations + non-current net derivatives.
A reconciliation of net debt is provided in note 10.
Gearing
Net debt divided by net assets.
Net assets as per the Group balance sheet.
APM Definition Reconciliation
Income statement
Like-for-like sales Year-on-year growth in sales including VAT, excluding fuel, excluding Financial Services, for stores that have been open for more than one year. A reconciliation of like-for-like sales is provided in the Financial Review on page 13.
Underlying profit before tax Profit or loss before tax before any items recognised which, by virtue of their size and or nature, do not reflect the Group's underlying performance. A reconciliation of underlying profit before tax is provided in note 3.
Retail underlying operating profit Underlying earnings before interest, tax, Financial Services operating profit and Sainsbury's underlying share of post-tax profit from JVs. A reconciliation of these measures can be found in note 4.
Underlying basic earnings per share Earnings per share using underlying profit as described above. A reconciliation of underlying earnings per share is included in note 7.
EBITDAR and underlying EBITDAR Earnings before interest, tax, depreciation, amortisation and rent. Underlying EBITDAR uses underlying earnings. A reconciliation is provided in the Financial Review on page 15.
Other
Lease adjusted net debt / underlying EBITDAR Net debt plus capitalised lease obligations (5.5% discount rate) divided by Group underlying EBITDAR A reconciliation of this is provided in the Financial Review on page 24
Return on capital employed Return on Capital Employed is calculated as Return divided by average Capital Employed.Return is defined as Underlying Profit before interest and tax.Capital Employed is defined as Net Assets excluding Net Debt. The average is calculated on a 14 point basis. A calculation of this is provided in the Financial Review on page 24.
This information is provided by RNS
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