4.1 Acquisitions – 2016
Acquisition of InterHealth Nutraceuticals Inc.
Effective 12 September 2016, Lonza acquired 100% of the shares of InterHealth Nutraceuticals Inc. (“InterHealth”) for a total consideration of USD 246 million (CHF 240 million), of which USD 229 million was paid in cash and USD 17 million arose from a contingent consideration arrangement. The contingent payments are based on the achievement of performance-related milestones and the range of undiscounted outcomes is between zero and USD 27.5 million. In addition, Lonza assumed InterHealth's net debt of USD 39 million (debt of USD 46 million net of cash & cash equivalents of USD 7 million) and repaid InterHealth's debt after the acquisition date.
InterHealth is a leader in research, development, manufacture and marketing of proprietary, value-added nutritional ingredients for use in dietary supplements, based in Benicia, CA (USA). The InterHealth business will become part of Lonza’s Consumer Care Business Unit, but will retain its facilities and employees. The combination of the two businesses allows Lonza to offer InterHealth’s more than 15 branded ingredients, including its cornerstone ingredient, UC-II®.
The InterHealth business is reported within the Specialty Ingredients segment.
From 12 September 2016 to 31 December 2016, the acquired business contributed sales of CHF 21 million and a result from operating activities of CHF 3 million to the Group1. If the acquisition had occurred on 1 January 2016, Group sales in 2016 would have been CHF 4,170 million (+ CHF 38 million) and the Group result from operating activities CHF 498 million (+ CHF 12 million). These amounts were calculated using the Group’s accounting policies and by adjusting the results of the subsidiary to reflect the additional amortization that would have been charged if the fair value adjustments to intangible assets had applied from January 2016.
The InterHealth identifiable assets acquired and liabilities assumed are set out in the table below and have been determined on a provisional basis:
|– Customer relationships||114|
|– Order backlog||5|
|Property, plant & equipment||1|
|Cash & cash equivalents||7|
|Deferred tax liabilities||(63)|
|Other net liabilities||(3)|
|Net identifiable assets||84|
|Total consideration transferred||240|
The fair value of the customer relationships was determined using an excess earning method while the fair value of the products was determined using a relief from royalty method. Both methods are based on management forecasts and observable market data for discount rates, tax rates and foreign exchange rates. The present value was calculated using a risk-adjusted discount rate of 11%. Portions of the valuation of the acquired assets and liabilities of InterHealth was performed by an independent valuation provider.
Goodwill includes the acquired workforce, expected synergies from integrating InterHealth into Lonza’s existing business as well as the expected future product development. None of the goodwill recognized is expected to be deductible for income tax purposes. The acquisition has been accounted for using the acquisition method.
Directly attributable transaction costs of CHF 2 million are reported in the Specialty Ingredients segment within administration and general overhead expenses.
Acquisition of Triangle Research Labs
Effective 27 April 2016, Lonza Group acquired Triangle Research Labs for a total consideration of USD 16 million (CHF 15 million), resulting in a goodwill of CHF 12 million. The U.S. – based company manufactures and supplies high-quality hepatocytes for medical and biomedical research in pre-clinical applications. This acquisition supports Lonza’s strategy to continue developing its life-science platform and expanding its global cell-biology portfolio.
The acquisition is reported within the Pharma&Biotech segment and does not have a significant impact on the consolidated financial statements for the twelve-month period ended 31 December 2016.
4.2 Acquisitions – 2015
Acquisition of Zelam Holdings Ltd
On 3 August 2015, the Lonza Group acquired 100% of the shares of Zelam Holdings Ltd, based in New Zealand (NZ). Zelam is a research-focused chemical company based in New Zealand (NZ), which develops and manufactures products for crop protection, specializing in fungicides, insecticides, herbicides, foliar nutrients and additives. Zelam also develops and manufactures products for wood protection. Based on the completed purchase price accounting, previously reported fair values of the acquired assets and liabilities were adjusted, which resulted in goodwill of CHF 7 million (2015: CHF 10 million).
Acquisition of Diacon Technologies Ltd
Effective 1 October 2015, Lonza Group acquired 100% of the shares of Diacon Technologies Ltd for a total consideration of CAD 17 million (CHF 12 million), resulting in a goodwill of CHF 4 million. Diacon is a leading formulator and supplier of anti-sapstain chemicals and ancillary sawmill products.
Both 2015 acquisitions are reported within the Specialty Ingredients segment and did not have a significant impact on the consolidated financial statements for the 12-month period ended 31 December 2015.
On 7 December 2016 Lonza announced that it entered into a definitive agreement with PolyPeptide Laboratories Holding (PPL) to sell the peptides business and operations of Lonza in Braine-l’Alleud, Belgium. Lonza’s Braine facility, with approximately 280 employees, is the center for peptide chemical development and manufacturing within Lonza. The agreement was subject to customary closing conditions and legally closed on 3 January 2017.
As IFRS 5 held for sale criteria were met in 2016, the Lonza Braine-related assets and liabilities are classified as a disposal group in assets held for sale and liabilities held for sale in the 2016 consolidated balance sheet.
An impairment loss of CHF 42 million has been included in ‘Other operating expenses’ for the write-down of the Lonza Braine disposal group to its estimated fair value less costs to sell. The impairment loss has been recorded to fully impair the Lonza Braine related goodwill of CHF 31 million as well as to reduce the carrying amount of property, plant & equipment (CHF 9 million) and intangible assets (CHF 2 million).
The agreed sales price (and estimated fair value of the disposal group) consists of an upfront payment from PPL as well as a contingent consideration, which is a percentage of the Lonza Braine net sales of the next five years.
At 31 December 2016 the assets held for sale and liabilities held for sale related to the Lonza Braine disposal are the following:
|Property, plant & equipment||39|
|Deferred tax assets||4|
|Cash and cash equivalents||4|
|Assets held for sale||91|
|Employee benefit liability||16|
|Other current operating liabilities||21|
|Liabilities held for sale||40|
The cumulative income or expense recognized in other comprehensive income related to the Lonza Braine operations is as follows:
|Re-measurements of net defined benefit liability, net of taxes||6|
|Exchange differences on translating foreign operations, net of taxes||29|
|Cumulative expense recognized in other comprehensive income||35|
As a result of the closing of the transaction on 3 January 2017, the accumulated exchange rate translation reserve losses of CHF 29 million will be reclassified to the income statement in 2017.
On 15 December 2016, Lonza announced that it has entered into a definitive agreement with KKR under which Lonza will acquire Capsugel S.A. (“Capsugel”) for USD 5.5 billion (CHF 5.60 billion at 2016 year-end rates) in cash, including refinancing of existing Capsugel debt of approximately USD 2 billion (CHF 2.04 billion at 2016 year-end rates), through a transaction that has been approved by the Boards of Directors of both Lonza and Capsugel.
Capsugel designs, develops and manufactures a wide range of innovative dosage forms for the biopharmaceutical and consumer health and nutrition industries.
The USD 5.5 billion all-cash acquisition of Capsugel is expected to be financed with a combination of debt and equity financing. Lonza has committed debt financing for the full acquisition amount from Bank of America Merrill Lynch and UBS and plans to raise equity which is fully underwritten by UBS and Bank of America Merrill Lynch for an amount up to CHF 3.3 billion.
Lonza Group Ltd has successfully placed 5 million new shares (from Lonza Group Ltd’s authorized capital as described in note 25) by way of an accelerated book building procedure with selected investors in Switzerland (private placement) and outside of Switzerland to institutional investors and qualified institutional buyers. The shares were placed at CHF 173.00 per new shares and the gross proceeds from the Placement amount are equal to CHF 865 million, which are intended to partially finance the acquisition of Capsugel. The new shares have been listed and are admitted to trading on the SIX Swiss Exchange on 3 February 2017.
Lonza’s Board intends to seek approval for additional share capital at its upcoming annual general meeting (AGM) in April 2017. The transaction is expected to close in the second quarter of 2017 and is subject to certain regulatory approvals and other customary closing conditions.
The impact from this transaction on the 2016 consolidated financial statements is limited to transaction related costs of CHF 11 million, paid fees of CHF 26 million for credit facilities committed by banks (whereof CHF 18 million classified as current and CHF 8 million as non-current) as well as derivative financial instruments to manage Lonza’s foreign currency exposure (see note 28.5).