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Acquisition | 6 Months Ended
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Mar. 29, 2015
Business Combinations [Abstract] |
Acquisition |
Note 2: | Acquisition
On September 23, 2014, we entered into a tender offer bid agreement with Starbucks Coffee Japan, Ltd. ("Starbucks Japan"), at the time a 39.5% owned equity method investment, and our joint venture partner, Sazaby League, Ltd. ("Sazaby"), to acquire the remaining 60.5% ownership interest in Starbucks Japan. Acquiring Starbucks Japan further leverages our existing infrastructure to continue disciplined retail store growth and expand our presence into other channels in the Japan market, such as consumer packaged goods ("CPG"), licensing and foodservice. This acquisition was structured as a two-step tender offer. On October 31, 2014, we acquired Sazaby's 39.5% ownership interest in Starbucks Japan through the first tender offer step for ¥55 billion in cash, or $509 million with Japanese yen converted into U.S. dollars at a reference conversion rate of 108.13 JPY to USD, based on a spot rate that approximates the rate as of the acquisition date, bringing our total ownership in Starbucks Japan to a controlling 79% interest. The estimated fair values of the assets acquired, liabilities assumed and the noncontrolling interest are based on preliminary valuation as of the October 31, 2014 acquisition date and are subject to change as additional information about the fair value of assets acquired, liabilities assumed and noncontrolling interest becomes available. The following table summarizes the allocation of the total consideration to the fair values of the assets acquired and liabilities assumed as of October 31, 2014 (in millions):
Consideration: |  |
Cash paid for Sazaby's 39.5% equity interest |  | $ | 508.7 |
Fair value of our preexisting 39.5% equity interest |  | 577.0 |
Total consideration |  | $ | 1,085.7 |
Fair value of assets acquired and liabilities assumed: |  |
Cash and cash equivalents |  | $ | 224.4 |
Accounts receivable, net |  | 37.4 |
Inventories |  | 26.4 |
Prepaid expenses and other current assets |  | 35.7 |
Deferred income taxes, net (current) |  | 23.4 |
Property, plant and equipment |  | 282.9 |
Other long-term assets |  | 141.4 |
Other intangible assets |  | 323.0 |
Goodwill |  | 815.6 |
Total assets acquired |  | 1,910.2 |
Accounts payable |  | (54.5 | )
Accrued liabilities |  | (119.9 | )
Deferred revenue |  | (36.5 | )
Deferred income taxes (noncurrent) |  | (92.9 | )
Other long-term liabilities |  | (109.6 | )
Total liabilities assumed |  | (413.4 | )
Noncontrolling interest |  | (411.1 | )
Total consideration |  | $ | 1,085.7 |
The assets acquired and liabilities assumed are reported within our China/Asia Pacific segment. Other current and long-term assets acquired primarily include various deposits, specifically lease and key money deposits. Accrued liabilities and other long-term liabilities assumed primarily include the financing obligations associated with the build-to-suit leases discussed below, as well as asset retirement obligations. The intangible assets are definite-lived and include reacquired rights, licensing agreements with Starbucks Japan's current licensees and Starbucks Japan's customer loyalty program. The reacquired rights of $305.0 million represent the fair value, calculated over the remaining original contractual period, to exclusively operate licensed Starbucks® retail stores in Japan. These rights will be amortized on a straight-line basis through March 2021, or over a period of approximately 6.4 years. The licensing agreements were valued at $15.0 million and will be amortized on a straight-line basis over a period of approximately 10.9 years, which is based on the remaining terms of the respective licensing agreements. The customer loyalty program was valued at $3.0 million and will be amortized on a straight-line basis over a period of 4.0 years, which represents the period during which we expect to benefit from these customer relationships. Below is a tabular summary of the acquired intangible assets as of March 29, 2015, for which the gross balances in total are $29.5 million lower than as of the October 31, 2014 acquisition date due to foreign currency translation (in millions):
| Mar 29, 2015
| Gross Carrying Amount |  | Accumulated Amortization |  | Net Carrying Amount
Reacquired rights | $ | 277.2 |  |  | $ | (18.0 | ) |  | $ | 259.2 |
Licensing agreements | 13.6 |  |  | (0.5 | ) |  | 13.1 |
Customer loyalty program | 2.7 |  |  | (0.3 | ) |  | 2.4 |
Total acquired definite-lived intangible assets | $ | 293.5 |  |  | $ | (18.8 | ) |  | $ | 274.7 |
Amortization expense for these definite-lived intangible assets for the quarter and two quarters ended March 29, 2015 was $11.3 million and $19.0 million, respectively, and is estimated to be approximately $45 million each year for the next five years and approximately $50 million thereafter. The $815.6 million of goodwill represents the intangible assets that do not qualify for separate recognition and primarily includes the acquired current customer base, the acquired workforce including store partners in the region that have strong relationships with these customers, the existing geographic retail and online presence, and the expected geographic presence in new channels. The goodwill was allocated to the China/Asia Pacific segment and is not deductible for income tax purposes. Due to foreign currency translation, the balance of goodwill related to the acquisition declined $74.4 million to $741.2 million as of March 29, 2015. As a part of this acquisition we acquired a significant number of operating leases, including $7.5 million of favorable lease assets, which are included in prepaid expenses and other current assets and other long-term assets, and $15.5 million of unfavorable lease liabilities, which are included in accrued liabilities and other long-term liabilities on the consolidated balance sheets. The fair values of these assets and liabilities were determined based on market terms for similar leases as of the date of the acquisition, and will be amortized on a straight-line basis as rent expense, or a reduction of rent expense, respectively, in cost of sales including occupancy costs on the consolidated statements of earnings over the remaining terms of the leases, for which the weighted-average period was 9.4 years as of the October 31, 2014 acquisition date. We recorded a net reduction of rent expense of $0.2 million and $0.4 million for the quarter and two quarters ended March 29, 2015, respectively, in connection with the leases acquired. Additionally, we acquired a number of build-to-suit lease arrangements that are accounted for as financing leases. Starbucks Japan is the deemed owner of buildings under build-to-suit lease arrangements since Starbucks Japan has significant continuing involvement with the respective lessors and does not qualify for sales recognition during the lease term under sale-leaseback accounting guidance. Accordingly, we have recorded the acquired buildings in property, plant and equipment, and the assumed offsetting lease financing obligations, representing the related future minimum lease payments, in other long-term liabilities, with the current portion recorded in accrued liabilities on the consolidated balance sheets. These financing obligations will be amortized based on the terms of the related lease agreements. The table below summarizes our estimated minimum future rental payments under the acquired non-cancelable operating leases and lease financing arrangements as of March 29, 2015 (in millions):
| Operating Leases |  | Lease Financing Arrangements
Year 1 | $ | 87.0 |  |  | $ | 3.2 |
Year 2 | 68.2 |  |  | 3.1 |
Year 3 | 53.1 |  |  | 3.1 |
Year 4 | 39.6 |  |  | 3.1 |
Year 5 | 31.7 |  |  | 3.1 |
Thereafter | 150.5 |  |  | 31.1 |
Total minimum lease payments | $ | 430.1 |  |  | $ | 46.7 |
The fair value of the noncontrolling interest in Starbucks Japan was estimated by applying the market approach. Specifically, the fair value was determined based on the purchase price we expected to pay for the remaining 21% noncontrolling interest, which was comprised of a set market price and a premium above the market price. The market price premium is a customary business practice for public tender offer transactions in Japan, so we believe this is what a market participant would pay and should be included in the fair value determination. As a result of this acquisition, we remeasured the carrying value of our preexisting 39.5% equity method investment to fair value, which resulted in a pre-tax gain of $390.6 million that was presented separately as gain resulting from acquisition of joint venture within other income on the consolidated statements of earnings. The fair value of $577.0 million was calculated using an average of the income and market approach. The income approach fair value measurement was based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within Level 3 of the fair value hierarchy. Key assumptions used in estimating future cash flows included projected revenue growth and operating expenses, as well as the selection of an appropriate discount rate. Estimates of revenue growth and operating expenses were based on internal projections and considered the historical performance of stores, local market economics and the business environment impacting the stores' performance. The discount rate applied was based on Starbucks Japan's weighted-average cost of capital and included a company-specific risk premium. The market approach fair value measurement was based on the implied fair value of Starbucks Japan using the purchase price of Sazaby's 39.5% ownership interest and the expected purchase price of the 21% remaining noncontrolling interest. We began consolidating Starbucks Japan's results of operations and cash flows into our consolidated financial statements beginning after October 31, 2014. For the quarter and two quarters ended March 29, 2015, Starbucks Japan's revenue included in our consolidated statements of earnings was $291.3 million and $484.1 million, respectively. For the quarter and two quarters ended March 29, 2015, Starbucks Japan's net earnings included in our consolidated statements of earnings were $18.5 million and $38.8 million, respectively. The following table provides the supplemental pro forma revenue and net earnings of the combined entity had the acquisition date of Starbucks Japan been the first day of our first quarter of fiscal 2014 rather than during our first quarter of fiscal 2015 (in millions):
|  | Pro Forma (unaudited)
|  | Quarter Ended |  | Two Quarters Ended
|  | Mar 29, 2015 |  | Mar 30, 2014 |  | Mar 29, 2015 |  | Mar 30, 2014
Revenue |  | $ | 4,563.5 |  |  | $ | 4,152.4 |  |  | $ | 9,458.5 |  |  | $ | 8,679.1 |
Net earnings attributable to Starbucks(1) |  | 495.6 |  |  | 418.5 |  |  | 1,097.3 |  |  | 1,340.3 |
(1) | The pro forma net earnings attributable to Starbucks for fiscal 2014 includes the acquisition-related gain of $390.6 million, and transaction and integration costs of $0.6 million and $12.2 million for the quarter and two quarters ended March 30, 2014, respectively.
The amounts in the supplemental pro forma earnings for the periods presented above fully eliminate intercompany transactions, apply our accounting policies and reflect adjustments for additional occupancy costs, depreciation and amortization that would have been charged assuming the same fair value adjustments to leases, property, plant and equipment and acquired intangibles had been applied on September 30, 2013. These pro forma results are unaudited and are not necessarily indicative of results of operations that would have occurred had the acquisition actually occurred in the prior year period or indicative of the results of operations for any future period. We initiated the second tender offer step on November 10, 2014 to acquire the remaining 21% ownership interest held by the public shareholders and option holders of Starbucks Japan's common stock, with the objective of acquiring all of the remaining outstanding shares including outstanding stock options. At the close of the second tender offer period on December 22, 2014, we funded the second tender offer step to acquire an additional 14.7% ownership interest for ¥31 billion in cash, or $258 million with Japanese yen converted into U.S. dollars at a reference conversion rate of 120.39 JPY to USD. However, we did not complete the second tender offer nor obtain control of these shares until the settlement date of December 29, 2014, which was the first day of our second quarter of fiscal 2015. Subsequent to the completion of the second tender offer step, we commenced a cash-out procedure under Japanese law (the "Cash-out") to acquire all remaining shares of Starbucks Japan (an approximate 6.3% interest). On March 26, 2015, we obtained control of these shares resulting in 100% ownership of Starbucks Japan. The purchase price for the Cash-out, which we expect to pay in the third quarter of fiscal 2015, is ¥13.5 billion, or approximately $113.3 million, with Japanese yen converted into U.S. dollars at a reference conversion rate of 118.99 JPY to USD, which is reflected in accrued liabilities on our consolidated balance sheet as of March 29, 2015. For the first quarter of fiscal 2015, net earnings attributable to noncontrolling interests in our consolidated statement of earnings related to Starbucks Japan reflects the 21% of minority shareholders’ interests that we did not own as of the end of the first quarter of fiscal 2015. For the second quarter of fiscal 2015, net earnings attributable to noncontrolling interests in our consolidated statement of earnings related to Starbucks Japan reflects the approximate 6.3% of minority shareholders’ interests that we did not obtain control of until March 26, 2015. The following table shows the effects of the change in Starbucks ownership interest in Starbucks Japan on Starbucks equity:
| Two Quarters Ended
| Mar 29, 2015 |  | Mar 30, 2014
Net earnings attributable to Starbucks | $ | 1,478.3 |  |  | $ | 967.6 |
Transfers (to)/from the noncontrolling interest: |  |  |
Increase/(decrease) in additional paid-in capital for purchase of interest in subsidiary | 1.7 |  |  | — |
Change from net earnings attributable to Starbucks and transfers (to)/from noncontrolling interest | $ | 1,480.0 |  |  | $ | 967.6 |
During the quarter and two quarters ended March 29, 2015, we incurred approximately $0.3 million and $11.3 million, respectively, of acquisition-related costs, such as regulatory, legal, and advisory fees, which we have recorded within unallocated corporate general and administrative expenses.

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- Definition The entire disclosure for business combinations, including leverage buyout transactions (as applicable), and divestitures. This may include a description of a business combination or divestiture (or series of individually immaterial business combinations or divestitures) completed during the period, including background, timing, and assets and liabilities recognized and reclassified or sold. This element does not include fixed asset sales and plant closings. + References No definition available. + Details
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