Financial Statements

5. Acquisition of subsidiary company

SuperGroup Europe BVBA (formerly CNC Collections BVBA)

On 3 February 2011 the Group acquired 100% of the share capital of its franchise and distribution partner in Benelux and France, SuperGroup Europe BVBA, together with its main subsidiaries: Snow & Surf BVBA, Basset BVBA, CNC Collections France SARL and SD Retail Netherlands (together 'SuperGroup Europe') for a consideration of £31.8m. The acquisition gives a strategic advantage to the Group in that it will accelerate the roll out of franchise stores across Europe, increase profitability and facilitate opening owned stores in key cities and shopping centres outside the UK.

The final consideration paid on completion was €3.9m (£3.5m) in cash plus 1,160,032 new ordinary shares of five pence each in SuperGroup Plc. The original cash consideration of €7.0m was reduced for a number of working capital and debt adjustments. The issue of shares represents a consideration of £18.0m, being calculated using SuperGroup's average share price on 3 February 2011 of 1549.8 pence per share.

Additional consideration of £10.3m, being satisfied by the issue of up to 662,876 new ordinary shares, is payable in two tranches subject to certain performance criteria being met over the next three years. The performance criteria required to be satisfied by SuperGroup Europe includes the opening of a certain number of new stores and the achievement of certain sales targets by the end of the second and third anniversaries of completion ('the Performance Criteria'). In the event that only a certain percentage proportion of the Performance Criteria is satisfied, then an equivalent percentage of the additional shares will be issued.

The first tranche of ordinary shares, equal to 33% of the additional consideration, is required to be issued on the second anniversary of completion and the second tranche of ordinary shares, equal to 67% of the additional consideration is required to be issued on the third anniversary.

The fair value of deferred contingent consideration was estimated by applying an assumed probability of achievement of the targets. At 1 May 2011 there was a debit of £0.4m recognised in the Group statement of comprehensive income for the contingent consideration arrangement.

The effective date of the acquisition was 3 February 2011. Accordingly, only 12 weeks and 3 days of trading have been recorded in the current period results. The results for the financial period include revenue of £11.7m and underlying profit before tax1 of £1.9m from operations acquired during the year.

Management have estimated that the acquisition would have generated revenue of £19.6m, after eliminating inter company sales, and underlying profit before tax of £7.1m if it had been owned for the full 52 weeks ended 1 May 2011.

Details of the acquisition are shown below:

Consideration paid and the fair value of assets and liabilities acquired were as follows:

£m
Consideration
Cash 3.5
Shares issued on acquisition 18.0
Deferred contingent consideration (to be satisfied in shares) 10.3
Total consideration 31.8
£m
Fair value of assets and liabilities acquired
Non-current assets
– property, plant and equipment 3.0
– intangible assets 8.5
Current assets
– inventories 6.5
– trade and other receivables 6.8
– cash and cash equivalents 0.6
Current liabilities
– trade and other payables (8.1)
– deferred tax liability (3.2)
Non-current liabilities
– borrowings (0.9)
Total fair value of identifiable net assets acquired 13.2
Goodwill 18.6
Total net assets recognised at acquisition 31.8

The fair value adjustments recorded in arriving at the fair value of assets and liabilities above were as follows:

£m
Intangible assets 8.5
Inventories 1.9
Trade and other receivables (0.2)
Deferred tax liability (3.5)
Total fair value adjustments 6.7

The fair value of the acquired identifiable intangible assets of £8.5m relates to distribution agreements. The fair value of distribution agreements also created a deferred tax liability of £3.0m.

The fair value adjustment to inventories under IFRS 3 (revised), which values inventories at its sales price less costs to sell, increased the value of inventory by £1.9m; the Directors have considered this to be a non-underlying adjustment to profit. The fair value adjustment to inventory also created a deferred tax liability of £0.5m.

The fair value of trade and other receivables is £6.8m and includes trade receivables with a fair value of £5.7m. The gross contractual amount for trade receivables due is £5.9m, of which £0.2m is expected to be uncollectable.

The goodwill represents those characteristics and valuable attributes of the acquired business that cannot be quantified and attributed to separately identifiable assets in accounting terms. This goodwill is underpinned by a number of elements the most significant of which is the well established, skilled and experienced management team, including the founder Luc Clément, which will allow us to accelerate our franchise roll out and provide a strategic platform for establishing our own stores in key locations in Europe. Other important elements include the benefit of greater profitability on existing sales in Benelux and France. The goodwill will not be deductible for tax purposes.