Preliminary results - 12 months ended 31 December 2005
4. Acquisitions
(a) RAC plc
On 4 May 2005, the Group acquired 100% of the share capital of RAC plc. The results of RAC plc's operations have been included in the consolidated financial statements of the Group with effect from 4 May 2005, and contributed £15 million to the consolidated profit before tax.
| £m | ||
|---|---|---|
| Purchase cost | ||
| Cash paid | 566 | |
| Fair value of 88 million shares issued, based on their published price at date of exchange (average of £6.03 per share) | 530 | |
| Costs attributable | 17 | |
| Total | 1,113 | |
The issue of new shares in the Company in exchange for shares in RAC plc has attracted merger relief under section 131 of the Companies Act 1985. Of the £530 million above, £22 million has been credited to share capital and £508 million has been credited to the merger reserve, increasing that reserve from £2,763 million to £3,272 million.
The assets and liabilities at the date of acquisition were:
| Book value £m |
Intangible revaluation £m |
Pension scheme valuation £m |
Fair value and accounting policy adjustments £m |
Fair value £m |
|
|---|---|---|---|---|---|
| Assets | |||||
| Intangible assets other than goodwill | 59 | 333 | - | - | 392 |
| Tax assets | 58 | - | - | (58) | - |
| Other assets | 608 | - | - | 38 | 646 |
| Total assets | 725 | 333 | - | (20) | 1,038 |
| Liabilities | |||||
| Provisions | |||||
| Pension deficit | (257) | - | (56) | - | (313) |
| Other | (8) | - | - | (14) | (22) |
| Tax liabilities | - | (118) | 17 | 83 | (18) |
| Other liabilities | (708) | - | - | (3) | (711) |
| Total liabilities | (973) | (118) | (39) | 66 | (1,064) |
| Net assets acquired | (248) | 215 | (39) | 46 | (26) |
| Goodwill (including £118 million arising from the creation
of the deferred tax liability on intangibles) |
1,139 | ||||
| Intangible assets | 392 | ||||
| Total goodwill and intangible assets | 1,531 | ||||
| Less: deferred tax liability | (118) | ||||
| Total value of goodwill and intangible assets net of associated tax included on balance sheet | 1,413 |
Separable intangible assets have been identified and valued by an independent third party at £392 million, using estimated post-tax cash flows and post-tax discount rates. The Group has assessed the useful economic lives of these intangibles, considering relevant factors such as usage of the asset, typical product lifecycles, potential obsolescence, maintenance costs, the stability of the industry, competitive position, and the period of control over the assets. In the case of the RAC and BSM brands, it has been determined that the existing lives of the assets, their competitive position in and the stability of their respective markets indicate that the brands have indefinite useful lives, and thus no amortisation has been charged in the period since acquisition. Of the total £392 million, £260 million has been assessed as having an indefinite life, with the remaining £132 million, mainly contractual customer relationships, being amortised over nine to 22 years.
A deferred tax liability of £118 million has been provided against these intangible assets, resulting in an increase in residual goodwill by this amount. Although this liability has been recognised in accordance with IAS 12, and a proportion will be amortised to the income statement as the related intangible asset is amortised, this liability is only payable if the intangible asset is sold separately and this is not expected to happen.
The pension scheme valuation adjustment and associated deferred taxation represents the effect of aligning the assumptions of the RAC plc schemes to those of Aviva. The fair value of the RAC pension deficit at the date of acquisition amounted to £313 million (£219 million after deferred tax).
The residual goodwill of £1,139 million essentially represents synergies, both in increased revenues and in reduced costs, expected to arise in RAC plc and our UK general insurance business as a result of the acquisition.
£109 million of integration costs for the restructuring of the combined Norwich Union Insurance and RAC businesses has been included in the results to 31 December 2005.
(b) Gresham Insurance Company Limited
On 31 March 2005, the Group acquired 100% of the share capital of Gresham Insurance Company Limited. The cash consideration including purchase costs was £75 million. The fair value of the net assets acquired, including intangibles of £14 million, was £75 million, giving rise to no goodwill on acquisition.
(c) Solus Automotive Limited
On 11 May 2005, the Group acquired 100% of the share capital of Solus Automotive Limited. The cash consideration including purchase costs was £20 million, including £12 million of cash and £8 million of deferred consideration. The fair value of the net assets acquired was nil, giving rise to £20 million of goodwill on acquisition.
(d) Unaudited pro-forma combined revenues and profit
Shown below are unaudited pro-forma figures for combined revenues and profit as though the acquisition date for all business combinations effected during the period had been 1 January 2005, after giving effect to purchase accounting adjustments and the elimination of inter-company transactions. The pro-forma financial information is not necessarily indicative of the combined results that would have been attained had the acquisitions taken place at 1 January 2005, nor is it necessarily indicative of future results.
| 2005 £m |
|
|---|---|
| Revenues (premiums and fee income) | 27,842 |
| IFRS profit before tax attributable to shareholders | 2,578 |
Of the above pre-tax profit, £21 million has arisen since acquisition.
(e) Non-adjusting post-balance sheet events:
(i) Irish bancassurance agreement
On 22 November 2005, the Group announced a new bancassurance agreement in Ireland between its wholly-owned subsidiary, Hibernian Group plc (Hibernian) and Allied Irish Banks plc (AIB). This will create a leading force in the Irish life and pensions market and bring further opportunities for growth in this market. The transaction completed on 27 January 2006, following the receipt of regulatory and European Commission approval.
Under the terms of the agreement, Hibernian Life Holdings Limited (HLH), the parent company of Hibernian Life & Pensions Limited, has acquired all the shares of Ark Life Assurance Company Limited (Ark Life) from AIB in exchange for a 24.99% stake in the enlarged HLH and a balancing cash payment of €195.4 million which also reflects the management of Ark Life funds by Hibernian Investment Managers Limited, part of the Group's fund management business. A further deferred payment of up to €10 million is payable, subject to the fulfilment of certain performance criteria.
AIB calculate embedded value on a different basis to that used by the Group and, in particular, do not use EEV principles. In view of the very recent timing of completion, it is currently impractical to comply with the requirements of paragraph 67 of IFRS 3, Business Combinations, and to state with any certainty the fair values of the assets and liabilities acquired, and therefore to estimate the goodwill arising on this acquisition and the unrealised gain on disposal of the Group's 24.99% interest in HLH.
The gain or loss on disposal of this interest in HLH will be calculated in accordance with SIC 13, Jointly Controlled Entities – Non-Monetary Contributions by Venturers, and will be recognised in 2006.
(ii) Acquisition in Sri Lanka
On 1 February 2006, the Group acquired a 51% interest in Eagle Insurance Limited (Eagle), the third largest insurer in Sri Lanka, by buying a majority shareholding in Eagle’s immediate holding company, NDB Finance Lanka (Pvt) Limited, for cash of £15 million. At the same time, Eagle has entered into a bancassurance agreement with National Development Bank Limited (NDB), Sri Lanka’s biggest development bank and Eagle’s other major shareholder.
Eagle calculates embedded value on a different basis to that used by the Group and, in particular, do not use EEV principles. In view of the very recent timing of completion, it is currently impractical to comply with the requirements of paragraph 67 of IFRS 3, Business Combinations, and to state with any certainty the fair values of the assets and liabilities acquired, and therefore to estimate the goodwill arising on this acquisition.
