REG - TP ICAP PLC - Final Results <Origin Href="QuoteRef">TCAPI.L</Origin> - Part 2
14/03/2017 07:07
- Part 2: For the preceding part double click ID:nRSN3463Za
ICAP 2016 unaudited pro forma income statement
£m TP ICAP Proforma
Revenue 891.5 795.1 1,686.6
Underlying operating profit 131.5 108.0 239.5
Underlying operating profit margin 14.8% 13.6% 14.2%
Finance income 5.3 3.0 8.3
Finance costs (15.2) (1.0) (16.2)
Underlying profit before tax 121.6 110.0 231.6
Tax (22.1) (30.0) (52.1)
Effective tax rate 18% 27% 23%
Share of JVs and associates less non-controlling interests 3.5 4.9 8.4
Net income 103.0 84.9 187.9
Exceptional items (1.9) - (1.9)
Acquisition, disposal and integration costs (57.9) - (57.9)
Earnings 43.2 84.9 128.1
Weighted average basic shares in issue 242.3 310.3 552.6
Underlying EPS 42.5p 27.4p 34.0p
Reported EPS 17.8p 27.4p 23.2p
The information included here represents what the income statement would have
looked like had the transaction taken place on 1 January 2016. The unaudited
pro forma Income Statement is compiled based on TP ICAP plc's 2016 from
audited financial statements together with financial data extracted from the
books and records of ICAP over the 12 month period to December 2016. The
transaction has created an organisation with historical annual pro forma
revenues of £1.7bn. Approximately 50% of the revenues are generated in the
EMEA region, 36% from the Americas, and 14% from APAC.
The combined business has approximately 3,000 brokers.
Underlying operating profit in 2016 would have been £239.5m.
The pro forma 2016 underlying operating margin would have been 14.2%.
Integration and Target Synergies
We have developed a comprehensive integration plan over the past year while we
waited for regulatory approvals for the acquisition.
The integration's main focus is on our global support functions. We do not
anticipate making any material changes to the front office as we know that our
clients value the pools of liquidity that both our long established brands
bring to the market.
The global support functions have provided back and middle office support to
two broadly similar businesses. We are confident that we can bring these
support functions together in a manner that provides an enhanced quality of
service, more efficient systems, and at substantially reduced costs.
In our shareholder circular issued we indicated an expectation that we would
achieve synergies of £60m. We have now had full access to data, processes and
people and have validated assumptions previously made and the preliminary
integration plans we had prepared.
We now believe that a reasonable target for the annualised synergies to be
achieved by the end of the three year programme is £80m. We have a further
ambition to realise an additional £20m of annualised synergies from process
optimisation by the end of 2020. For synergy savings to be recognised in a
year's results, the work must be completed in the previous period.
The integration work will take three years and the costs will be front-loaded,
while the synergy savings will be recognised predominantly in 2018 and 2019.
We expect to achieve synergies in 2017, 2018, 2019 and 2020 of £10m, £50m,
£20m and £20m respectively, at a cost in the respective years of £40m, £40m,
£20m and £10m.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Consolidated Income Statement
for the year ended 31 December 2016
Notes Underlying Acquisition,disposal andintegrationcosts ExceptionalItems Total
2016 £m £m £m £m
Revenue 3 891.5 - - 891.5
Administrative expenses (763.5) (56.6) (5.2) (825.3)
Other operating income 6 3.5 - 3.6 7.1
Operating profit 4,5 131.5 (56.6) (1.6) 73.3
Finance income 7 5.3 - - 5.3
Finance costs 8 (15.2) (6.6) - (21.8)
Profit before tax 121.6 (63.2) (1.6) 56.8
Taxation (22.1) 5.3 (0.3) (17.1)
Profit after tax 99.5 (57.9) (1.9) 39.7
Share of results of associates and joint ventures 4.0 - - 4.0
Profit for the year 103.5 (57.9) (1.9) 43.7
Attributable to:
Equity holders of the parent 103.0 (57.9) (1.9) 43.2
Non-controlling interests 0.5 - - 0.5
103.5 (57.9) (1.9) 43.7
Earnings per share
Basic 9 42.5p 17.8p
Diluted 9 41.0p 17.2p
2015
Revenue 3 796.0 - - 796.0
Administrative expenses (693.9) (24.9) (28.4) (747.2)
Other operating income 6 5.8 0.2 67.1 73.1
Operating profit 4,5 107.9 (24.7) 38.7 121.9
Finance income 7 4.1 - - 4.1
Finance costs 8 (18.3) (2.0) - (20.3)
Profit before tax 93.7 (26.7) 38.7 105.7
Taxation (17.5) 3.0 (10.5) (25.0)
Profit after tax 76.2 (23.7) 28.2 80.7
Share of results of associates 2.6 - - 2.6
Profit for the year 78.8 (23.7) 28.2 83.3
Attributable to:
Equity holders of the parent 78.4 (23.7) 28.2 82.9
Non-controlling interests 0.4 - - 0.4
78.8 (23.7) 28.2 83.3
Earnings per share
Basic 9 32.2p 34.0p
Diluted 9 31.5p 33.3p
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2016
2016 2015
£m £m
Profit for the year 43.7 83.3
Items that will not be reclassified subsequentlyto profit or loss:
Remeasurement of defined benefit pension schemes 5.8 24.5
Taxation charge relating to item not reclassified (2.0) (8.6)
3.8 15.9
Items that may be reclassified subsequentlyto profit or loss:
Revaluation of available-for-sale investments 0.8 0.1
Effect of changes in exchange rates on translationof foreign operations 59.7 8.8
Taxation charge relating to items that may be reclassified - (0.5)
60.5 8.4
Other comprehensive income for the year 64.3 24.3
Total comprehensive income for the year 108.0 107.6
Attributable to:
Equity holders of the parent 107.3 107.1
Non-controlling interests 0.7 0.5
108.0 107.6
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Consolidated Balance Sheet
as at 31 December 2016
Notes 2016£m 2015£m
Non-current assets
Intangible assets arising on consolidation 11 1,713.1 357.4
Other intangible assets 70.1 22.1
Property, plant and equipment 35.6 27.4
Investment in associates 53.5 6.0
Investment in joint ventures 8.0 -
Available-for-sale investments 23.5 8.5
Deferred tax assets 26.5 2.4
Retirement benefit assets 100.0 88.2
Other long term receivables 18.4 -
2,048.7 512.0
Current assets
Trade and other receivables 23,160.5 2,639.2
Financial assets 14 89.5 20.3
Cash and cash equivalents 14 696.1 358.9
23,946.1 3,018.4
Total assets 25,994.8 3,530.4
Current liabilities
Trade and other payables (23,238.1) (2,666.7)
Interest bearing loans and borrowings 14 (467.3) (140.9)
Current tax liabilities (41.7) (17.3)
Short term provisions (19.3) (21.3)
(23,766.4) (2,846.2)
Net current assets 179.7 172.2
Non-current liabilities
Interest bearing loans and borrowings 14 (79.5) (79.3)
Deferred tax liabilities (197.3) (33.2)
Long term provisions (9.4) (7.8)
Other long term payables (19.8) (22.2)
Retirement benefit obligations (3.3) -
(309.3) (142.5)
Total liabilities (24,075.7) (2,988.7)
Net assets 1,919.1 541.7
Equity
Share capital 138.5 60.9
Share premium 17.1 17.1
Merger reserve 1,377.5 178.5
Other reserves (1,111.0) (1,165.1)
Retained earnings 1,475.6 1,448.6
Equity attributable to equity holders of the parent 1,897.7 540.0
Non-controlling interests 21.4 1.7
Total equity 1,919.1 541.7
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Consolidated Statement of Changes in Equity
for the year ended 31 December 2016
Equity attributable to equity holders of the parent
Sharecapital Sharepremiumaccount Mergerreserve Reverseacquisitionreserve Re-valuationreserve Hedgingandtranslation Ownshares Retainedearnings Total Non-controllinginterests Totalequity
2016 £m £m £m £m £m £m £m £m £m £m £m
Balance at1 January 2016 60.9 17.1 178.5 (1,182.3) 1.4 15.9 (0.1) 1,448.6 540.0 1.7 541.7
Profit for the year - - - - - - - 43.2 43.2 0.5 43.7
Other comprehensiveincome for the year - - - - 0.8 59.5 - 3.8 64.1 0.2 64.3
Total comprehensive income for the year - - - - 0.8 59.5 - 47.0 107.3 0.7 108.0
Dividends paid - - - - - - - (40.7) (40.7) (0.5) (41.2)
Own shares acquired for employee trusts - - - - - - (6.2) - (6.2) - (6.2)
Issue of ordinary shares 77.6 - 1,205.6 - - - - - 1,283.2 - 1,283.2
Share issue costs - - (6.6) - - - - - (6.6) - (6.6)
Non-controlling interests arising on acquisitions - - - - - - - - - 19.5 19.5
Credit arising on share-based payment awards - - - - - - - 20.7 20.7 - 20.7
Balance at 31 December 2016 138.5 17.1 1,377.5 (1,182.3) 2.2 75.4 (6.3) 1,475.6 1,897.7 21.4 1,919.1
2015
Balance at1 January 2015 60.9 17.1 178.5 (1,182.3) 1.4 7.6 (0.1) 1,378.8 461.9 1.6 463.5
Profit for the year - - - - - - - 82.9 82.9 0.4 83.3
Other comprehensiveincome for the year - - - - - 8.3 - 15.9 24.2 0.1 24.3
Total comprehensive income for the year - - - - - 8.3 - 98.8 107.1 0.5 107.6
Dividends paid - - - - - - - (41.0) (41.0) (0.4) (41.4)
Credit arising on share-based payment awards - - - - - - - 12.0 12.0 - 12.0
Balance at 31 December 2015 60.9 17.1 178.5 (1,182.3) 1.4 15.9 (0.1) 1,448.6 540.0 1.7 541.7
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Consolidated Cash Flow Statement
for the year ended 31 December 2016
Notes 2016 2015
£m £m
Cash flows from operating activities 13 58.6 144.0
Investing activities
Sale/(purchase) of financial assets 2.3 (10.7)
Sale/(purchase) of available-for-sale investments 0.2 (0.4)
Interest received 2.1 1.8
Dividends from associates 2.0 1.5
Expenditure on intangible fixed assets (14.7) (9.3)
Purchase of property, plant and equipment (2.8) (4.6)
Deferred consideration paid (3.2) -
Investment in joint ventures (0.2) -
Acquisition consideration paid - (11.6)
Cash acquired with acquisitions 316.3 1.7
Cash sold with subsidiaries - (0.3)
Net cash flows from investment activities 302.0 (31.9)
Financing activities
Dividends paid 10 (40.7) (41.0)
Dividends paid to non-controlling interests (0.5) (0.4)
Own shares acquired for employee trusts (6.2) -
Drawdown of revolving credit facility 140.0 -
Repayment of maturing Sterling Notes (141.1) -
Funds received from bank debt 470.0 -
Repayment of revolving credit facility (140.0) -
Repayment of loan acquired with ICAP (330.0) -
Debt issue and bank facility arrangement costs (3.9) (4.3)
Net cash flows from financing activities (52.4) (45.7)
Net increase in cash and cash equivalents 308.2 66.4
Net cash and cash equivalents at thebeginning of the year 358.9 287.1
Effect of foreign exchange rate changes 29.0 5.4
Net cash and cash equivalents at the end of the year 14 696.1 358.9
Cash and cash equivalents 698.5 358.9
Overdrafts (2.4) -
Cash and cash equivalents at the end of the year 696.1 358.9
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Notes to the Consolidated Financial Statements
for the year ended 31 December 2016
1. General information
TP ICAP plc (formerly Tullett Prebon plc) is a company incorporated in England
and Wales under the Companies Act.
2. Basis of preparation
(a) Basis of accounting
The financial information included in this document does not constitute the
Group's statutory accounts for the years ended 31 December 2016 or 2015, but
is derived from those accounts. Statutory accounts for 2015 have been
delivered to the Registrar of Companies and those for 2016 will be delivered
following the Company's Annual General Meeting. The auditor has reported on
those accounts; their reports were unqualified, did not draw attention to any
matters by way of emphasis without qualifying their report and did not contain
a statement under section 498(2) or 498(3) of the Companies Act 2006.
The Financial Statements have been prepared on the historical cost basis,
except for the revaluation of certain financial instruments.
The Directors have a reasonable expectation that the Group has adequate
resources to continue in operational existence for the foreseeable future.
Accordingly, the going concern basis continues to be used in preparing these
Financial Statements.
(b) Basis of consolidation
The Group's Consolidated Financial Statements incorporate the Financial
Statements of the Company and entities controlled by the Company made up to 31
December each year. Under IFRS 10 control is achieved where the Company
exercises power over an entity, is exposed to, or has rights to, variable
returns from its involvement with the entity and has the ability to use its
power to affect the returns from the entity.
(c) Presentation of the Income Statement
The Group maintains a columnar format for the presentation of its Consolidated
Income Statement. The columnar format enables the Group to continue its
practice of aiding the understanding of its results by presenting its
underlying profit. This is the profit measure used to calculate underlying
EPS (Note 9) and is considered to be the most appropriate as it better
reflects the Group's underlying earnings. Underlying profit is reconciled to
profit before tax on the face of the Consolidated Income Statement, which also
includes acquisition, disposal and integration costs and exceptional items.
The column 'acquisition, disposal and integration costs' includes: any gains,
losses or other associated costs on the full or partial disposal of
investments, associates, joint ventures or subsidiaries and costs associated
with a business combination that do not constitute fees relating to the
arrangement of financing; amortisation or impairment of intangible assets
arising on consolidation; any re-measurement after initial recognition of
contingent consideration which has been classified as a liability, and any
gains or losses on the revaluation of previous interests. The column may also
include items such as gains or losses on the settlement of pre-existing
relationships with acquired businesses and the re-measurement of liabilities
that are above the value of indemnification.
Acquisition-related integration costs include costs associated with exit or
disposal activities, which do not meet the criteria of discontinued
operations, including costs for employee and lease terminations, or other exit
activities. Additionally, these costs include expenses directly related to
integrating and reorganising acquired businesses and include items such as
employee retention costs, recruiting costs, certain moving costs, certain
duplicative costs during integration and asset impairments.
Items which are of a non-routine nature and material, when considering both
size and nature, are disclosed separately to give a clearer presentation of
the Group's results. These are shown as 'exceptional items' on the face of
the Consolidated Income Statement.
(d) Adoption of new and revised Accounting Standards
The following new and revised Standards and Interpretations have been adopted
in the current year although their adoption has not had any significant impact
on the Financial Statements:
· Amendments to IAS 1 'Presentation of financial statements' regarding
disclosures;
· Annual Improvements to IFRSs (2012-2014 Cycle);
· Amendments to IAS 16 and IAS 38 regarding the clarification of
acceptable methods of depreciation and amortisation; and
· Amendments to IFRS 11 regarding the accounting for acquisition of
interests in Joint Operations.
3. Segmental analysis
Products and services from which reportable segments derive their revenues
The Group is organised by geographic reporting segments which are used for the
purposes of resource allocation and assessment of segmental performance by
Group management. These are the Group's reportable segments under IFRS 8
'Operating Segments'.
Each geographic reportable segment derives revenue from Energy and
Commodities, Interest Rate Derivatives, Fixed Income, Treasury Products,
Equities, and Information Sales and Risk Management Services.
Information regarding the Group's operating segments is reported below:
2016 2015
Revenue: £m £m
Europe and the Middle East 480.9 455.3
Americas 279.6 234.5
Asia Pacific 131.0 106.2
891.5 796.0
Operating profit:
Europe and the Middle East 97.7 81.2
Americas 18.2 14.9
Asia Pacific 15.6 11.8
Underlying operating profit 131.5 107.9
Acquisition, disposal and integration costs (Note 4) (56.6) (24.7)
Exceptional items (Note 5) (1.6) 38.7
Reported operating profit 73.3 121.9
Finance income 5.3 4.1
Finance costs (21.8) (20.3)
Profit before tax 56.8 105.7
Taxation (17.1) (25.0)
Profit after tax 39.7 80.7
Share of results of associates and joint ventures 4.0 2.6
Profit for the year 43.7 83.3
There are no inter-segment sales included in segment revenue.
2016 2015
Revenue by product group £m £m
Energy and Commodities 245.3 204.3
Interest Rate Derivatives 143.6 135.3
Fixed Income 183.0 171.2
Treasury Products 194.1 185.0
Equities 57.3 46.3
Information Sales and Risk Management Services 68.2 53.9
891.5 796.0
4. Acquisition, disposal and integration costs
Acquisition, disposal and integration costs comprise:
2016 2015
£m £m
ICAP acquisition costs 16.8 12.1
ICAP integration costs 19.3 -
Other acquisition costs 0.3 0.5
Acquisition related share-based payment charge 16.3 10.5
Amortisation of intangible assets arising on consolidation 1.4 1.2
Loss on disposal of subsidiary undertakings and associates 0.3 0.6
Adjustment to acquisition consideration 2.2 (0.2)
56.6 24.7
Finance costs (Note 8) 6.6 2.0
63.2 26.7
Taxation (5.3) (3.0)
57.9 23.7
ICAP integration costs incurred in the year can be analysed as follows:
2016 2015
£m £m
Employee related costs 7.3 -
Premises and equipment 0.5 -
Other administrative costs 11.5 -
19.3 -
5. Exceptional items
Exceptional items comprise:
2016 2015
£m £m
Pension scheme settlement gains (3.6) -
Net credit relating to major legal actions - (64.4)
Charge relating to cost improvement programmes 5.2 25.7
1.6 (38.7)
Taxation 0.3 10.5
1.9 (28.2)
6. Other operating income
Other operating income represents receipts such as rental income, royalties,
insurance proceeds, settlements from competitors, business relocation grants
and pension scheme settlement gain. Costs associated with such items are
included in administrative expenses.
7. Finance income
2016 2015
£m £m
Interest receivable and similar income 2.1 1.8
Deemed interest arising on thedefined benefit pension scheme surplus 3.2 2.3
5.3 4.1
8. Finance costs
Underlying Acquisitionrelated Total
£m £m £m
2016
Interest and fees payable on bank facilities 3.9 3.3 7.2
Interest payable on Sterling Notes July 2016 5.1 - 5.1
Interest payable on Sterling Notes June 2019 4.2 - 4.2
Other interest payable 0.5 - 0.5
Amortisation of debt issue and bank facility costs 1.2 3.0 4.2
Total borrowing costs 14.9 6.3 21.2
Unwind of discounted liabilities 0.3 0.3 0.6
15.2 6.6 21.8
2015
Interest and fees payable on bank facilities 1.6 0.6 2.2
Interest payable on Sterling Notes July 2016 9.9 - 9.9
Interest payable on Sterling Notes June 2019 4.2 - 4.2
Other interest payable 0.4 - 0.4
Amortisation of debt issue and bank facility costs 1.8 1.1 2.9
Total borrowing costs 17.9 1.7 19.6
Unwind of discounted liabilities 0.4 0.3 0.7
18.3 2.0 20.3
Acquisition related items include £6.0m of fees and interest relating to the
acquisition of ICAP that were incurred on facilities arranged in contemplation
of the transaction, costs of £0.3m incurred on a planned refinancing of the
Group's £141.1m Sterling Notes that was cancelled due to the acquisition, and
£0.3m relating to unwinding the discount on PVM deferred consideration.
9. Earnings per share
2016 2015
Basic - underlying 42.5p 32.2p
Diluted - underlying 41.0p 31.5p
Basic earnings per share 17.8p 34.0p
Diluted earnings per share 17.2p 33.3p
The calculation of basic and diluted earnings per share is based on the
following number of shares:
2016No.(m) 2015No.(m)
Basic weighted average shares(1) 242.3 243.6
Contingently issuable shares 9.1 5.1
Diluted weighted average shares(1) 251.4 248.7
Note:
1. The 310,314,296 shares issued to acquire ICAP at the end of December
2016 have a nil weighting when calculating the weighted average number of
shares for 2016 because the shares were issued at the end of the year and none
of the earnings related to the newly issued shares.
The earnings used in the calculation of underlying, basic and diluted earnings
per share, are set out below:
2016 2015
£m £m
Earnings for the year 43.7 83.3
Non-controlling interests (0.5) (0.4)
Earnings 43.2 82.9
Acquisition, disposal and integration costs (Note 4) 63.2 26.7
Exceptional and acquisition related items (Note 5) 1.6 (38.7)
Tax on exceptional and acquisition related items (5.0) 7.5
Underlying earnings 103.0 78.4
10. Dividends
2016 2015
£m £m
Amounts recognised as distributions toequity holders in the year:
Interim dividend for the year ended 31 December 2016of 5.6p per share 13.5 -
Final dividend for the year ended 31 December 2015of 11.25p per share 27.2 -
Interim dividend for the year ended 31 December 2015of 5.6p per share - 13.6
Final dividend for the year ended 31 December 2014of 11.25p per share - 27.4
40.7 41.0
In respect of the current year, the Directors declared a second interim
dividend of 11.25p per share amounting to £27.2m which was paid on 13 January
2017 to all shareholders that were on the Register of Members on 23 December
2016. This dividend has not been included as a liability in these Financial
Statements.
The trustees of the Tullett Prebon plc Employee Benefit Trust 2007 have waived
their rights to dividends.
11. Intangible assets arising on consolidation
Goodwill Other Total
2016 £m £m £m
At 1 January 2016 347.5 9.9 357.4
Recognised on acquisitions - ICAP 687.0 639.0 1,326.0
Recognised on acquisitions - other 2.9 - 2.9
Amortisation of acquisition related intangibles - (1.4) (1.4)
Effect of movements in exchange rates 26.5 1.7 28.2
At 31 December 2016 1,063.9 649.2 1,713.1
2015
At 1 January 2015 327.1 9.5 336.6
Recognised on acquisitions 14.5 1.1 15.6
Amortisation of acquisition related intangibles - (1.2) (1.2)
Effect of movements in exchange rates 5.9 0.5 6.4
At 31 December 2015 347.5 9.9 357.4
Other intangible assets at 31 December 2016 represent customer relationships,
£610.0m (2015: £8.5m), business brands and trademarks, £28.2m (2015: £1.4m),
and other intangibles, £11.0m (2015: £nil) that arise through business
combinations. Customer relationships are being amortised over 20 years.
Goodwill arising through business combinations has been allocated to
individual cash-generating units ('CGUs') for impairment testing as follows:
2016 2015
£m £m
Europe and the Middle East 195.1 195.1
North America 93.5 75.9
Brazil 3.5 2.3
Asia Pacific 19.3 19.3
PVM 65.5 54.9
Goodwill allocated to CGUs 376.9 347.5
Unallocated goodwill 687.0 -
1,063.9 347.5
The provisional amount of goodwill arising on the acquisition of ICAP (Note
12) has not been allocated to CGUs due to the proximity of the acquisition to
the year-end. As permitted by IAS 36 'Impairment of assets', allocation to
relevant CGUs will be completed before the end of 2017. As the goodwill has
not been allocated to relevant CGUs it has not been assessed for impairment in
the current period.
Determining whether goodwill is impaired requires an estimation of the
recoverable amount of each CGU. The recoverable amount of each CGU is the
higher of its value in use ('VIU') or its net realisable value ('NRV').
As at 31 December 2016 VIU has been used to estimate recoverable amounts for
all CGUs except for Brazil where the recoverable amount has been based on that
CGU's NRV. For all CGUs, the estimate of the recoverable amount was higher
than the carrying value. The key assumptions for the VIU calculations are
those regarding expected cash flows arising in future periods, regional growth
rates and the discount rates. Future cash flow projections are based on the
most recent financial budgets considered by the Board which are used to
project cash flows for the next five years. After this period a steady state
cash flow is used to derive a terminal value for the CGU. Goodwill has an
indefinite life and this is reflected in the calculation of the CGU's terminal
value. Estimated average growth rates, based on each region's constituent
country growth rates as published by the World Bank, are used to estimate cash
flows after the budgeted period. Discount rates used are based on the Group's
weighted average cost of capital and are a function of the Group's cost of
equity, derived using a Capital Asset Pricing Model ('CAPM'), and the Group's
cost of debt. The cost of equity estimate depended on inputs in the CAPM
reflecting a number of variables including the risk-free rate and a premium to
reflect the inherent risk of the business being evaluated. These inputs are
based on external assessment of economic variables together with management's
judgement.
The VIU calculations used annual growth rates of 2% for Europe and the Middle
East (2015: 2%), 2.5% for North America (2015: 2.5%), 3% for Asia Pacific
(2015: 3%) and 2% for PVM (2015: 2%). Terminal values for each CGU assumed no
further growth reflecting longer term forecasting constraints. Resultant cash
flows for Europe and the Middle East, North America, Asia Pacific and PVM have
been discounted at a pre-tax discount rate of 10.5% (2015: 10.5% with 12.5%
for North America).
These calculations have been subject to stress tests reflecting reasonably
possible changes in key assumptions. All VIU calculations are insensitive to
reasonably possible changes in the discount rate and are most sensitive to
lower growth rate assumptions which reduce expected cash flows. With zero
growth all CGUs' recoverable amounts were still higher than their carrying
value. At this level the recoverable amount for Europe and the Middle East
exceeded its carrying value by £203m, which reduces to nil if annual growth
rates fall to negative 4% over the projected cash flow period, North America
exceeded its carrying value by £145m, which reduces to nil if annual growth
rates fall to negative 4% over the projected cash flow period, and Asia
exceeded its carrying value by £106m, which reduces to nil if annual growth
rates fall to negative 6% over the projected cash flow period. The impact on
future cash flows resulting from falling growth rates does not reflect any
management actions that would be taken under such circumstances.
12. Acquisitions
ICAP
On 30 December 2016, the Group issued 310.3m ordinary shares to acquire 100%
of the share capital of ICAP Global Broking Holdings Limited ('ICAP'). The
fair value of the shares issued was £1,283.2m, representing their market value
at the date of issue. No further consideration is payable in respect of the
acquisition.
Due to the proximity of the acquisition to the year end and its size and
complexity, the identification and measurement of the fair value of the assets
acquired are incomplete and provisional. Similarly, the allocation of the
excess purchase price between identifiable intangible assets and goodwill that
arise on the consolidation of ICAP are also provisional. As permitted by IFRS
3 'Business Combinations', the finalisation of the identification and
measurement of the fair value of the assets and liabilities acquired, and the
allocation of the excess purchase price, will be completed during the twelve
month 'measurement period' ending on 30 December 2017. No measurement period
adjustments have been recognised in 2016.
This transaction has been accounted for under the acquisition method of
accounting.
ProvisionalFair value
£m
Net assets acquired (provisional)
Intangible assets relating to purchased and developed software 41.2
Property, plant and equipment 10.6
Investment in associates 44.7
Investment in joint ventures 8.0
Available-for-sale investments 13.4
Deferred tax assets 22.6
Trade and other receivables 13,670.3
Financial assets 67.2
Cash and cash equivalents 316.3
Total assets 14,194.3
Trade and other payables (13,685.8)
Loans and borrowings (330.0)
Current tax liabilities (24.5)
Deferred tax liabilities (0.2)
Provisions (13.8)
Retirement benefit obligations (3.3)
Total liabilities (14,057.6)
Non-controlling interests (19.5)
117.2
Intangible assets arising on consolidation (provisional)
Other intangible assets 639.0
Deferred tax liabilities arising on other intangible assets (160.0)
Goodwill 687.0
Fair value of total consideration 1,283.2
Satisfied by:
Issue of ordinary shares 1,283.2
Intangible assets arising on consolidation, have been provisionally allocated
to the ICAP brand, £27.0m, the value of customer relationships, £601.0m, and
other intangibles having finite lives, £11.0m. An associated deferred tax
liability of £160.0m has been recognised on acquisition, based on the regional
allocation of these assets and applicable tax rates, none of which has been
offset against the Group's deferred tax assets. The balance of £687.0m has
been provisionally recognised as goodwill, representing the value of the
established workforce and the business's reputation.
The fair value of the brand has been estimated using a relief-from-royalty
approach, based on empirical, market derived rates for such assets and is
sensitive to changes in the royalty rate applied. The fair value of customer
relationships has been estimated using the 'multi-period excess earnings
methodology' which uses the net present value of forecast, post-tax profits
generated by that asset. The fair value of customer relationships is sensitive
to changes in: forecast post-tax profits; the discount rate applied; the
assumed useful life of the assets; the expected rate of customer attrition;
and, the level of contributory asset charges for the use of other assets,
including a charge for the workforce. Changes to the provisional fair values
of the identified intangible assets would result in a change to the associated
deferred tax liability, with an equal and opposite change in the provisional
amount of goodwill.
Trade and other receivables, financial assets, and cash and cash equivalents
are disclosed at their provisional fair values but are not substantially
different from their previous carrying values, reflecting the nature of those
assets and the business acquired. Contractual amounts receivable are
estimated to be £1.7m higher which are not currently expected to be received.
Indemnification assets of £15.5m, receivable from NEX, have been recognised on
acquisition and are included with trade and other receivables. The fair value
of these assets reflect the fair value of the provisions against which the
indemnification has been received. No contingent liabilities are currently
recognised at fair value as such liabilities cannot be reliably measured due
to the proximity of the acquisition to the date these financial statements
were approved. Should such contingent liabilities be recognised during the
measurement period they would be matched by a further indemnification asset of
an equal value. Recognition of these assets and liabilities would not change
the provisional value of goodwill currently recognised.
Provisional goodwill is not expected to be deductible for tax purposes and no
associated deferred tax asset has been recorded.
ICAP is not reflected in the Group's results for 2016. Had ICAP been acquired
on 1 January 2016 revenue would have been £795.1m higher, underlying operating
profit £108.0m higher and underlying earnings £84.9m higher. If the 310.3m
ordinary shares issued to acquire ICAP had been issued on 1 January 2016 the
basic weighted average shares (Note 9) would have been 552.6m, resulting in an
underlying basic EPS 8.5p lower at 34.0p.
Acquisition costs, included in administrative expenses, amounted to £16.8m in
2016 and £12.1m in 2015. £6.6m of costs attributable to the issue of the
ordinary shares have been expensed directly to equity.
Creditex
In July 2016, the Group announced the acquisition of Creditex's US hybrid
voice brokerage business. Under the agreement, deferred contingent
consideration is payable through to the third anniversary of completion. The
amount of deferred contingent consideration is dependent upon the performance
of the business over the three year period and has a fair value estimated to
be US$3.8m (£2.9m). The fair value of the net assets acquired is negligible
which resulted in the recognition of US$3.8m (£2.9m) of goodwill arising on
consolidation.
Other acquisitions
During 2016 the Group acquired other interests on which no initial payments
were made. Deferred consideration is payable with an estimated fair value of
£0.3m. The fair value of the net assets acquired was £0.3m resulting in no
goodwill being recognised.
13. Reconciliation of operating result to net cash from operating
activities
2016 2015
£m £m
Operating profit 73.3 121.9
Adjustments for:
Share-based compensation expense 4.4 1.5
Pension scheme's administration costs 0.9 0.7
Depreciation of property, plant and equipment 8.0 7.7
Amortisation of intangible assets 8.4 7.3
Pension scheme settlement gains (3.6) -
Acquisition related share-based payment charge 16.3 10.5
Amortisation of intangible assets arising on consolidation 1.4 1.2
Loss on disposal of property, plant and equipment - 0.2
Loss on derecognition of intangible assets - 0.1
Loss on disposal of associates and subsidiary undertakings 0.1 0.2
Remeasurement of deferred consideration 2.2 0.4
Impairment of available-for-sale investments 0.2 -
Non cash movement in FVTPL balances 0.9 -
(Decrease)/increase in provisions for liabilities and charges (17.7) 11.5
Decrease in non-current liabilities (1.1) (0.8)
Operating cash flows before movement in working capital 93.7 162.4
(Increase)/decrease in trade and other receivables (17.9) 0.1
(Increase)/decrease in net settlement and trading balances (2.5) 1.3
Increase in trade and other payables 23.1 16.5
Cash generated from operations 96.4 180.3
Income taxes paid (16.7) (19.5)
Interest paid (21.1) (16.8)
Net cash from operating activities 58.6 144.0
14. Analysis of net funds
At 1January2016£m Cashflow £m Non cashitems£m Acquired with acquisitions £m Exchangeratemovements£m At 31December2016£m
Cash 296.7 336.8 - - 23.5 657.0
Cash equivalents 62.2 (26.2) - - 5.5 41.5
Overdrafts - (2.4) - - - (2.4)
Cash and cash equivalents 358.9 308.2 - - 29.0 696.1
Financial assets 20.3 (2.3) - 67.2 4.3 89.5
Total funds 379.2 305.9 - 67.2 33.3 785.6
Notes due within one year (140.9) 141.1 (0.2) - - -
Bank loan due within one year - (466.2) (1.1) - - (467.3)
Notes due after one year (79.3) - (0.2) - - (79.5)
(220.2) (325.1) (1.5) - - (546.8)
Total net funds 159.0 (19.2) (1.5) 67.2 33.3 238.8
Cash and cash
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