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Divestitures and Acquisitions | 9 Months Ended
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Sep. 30, 2015
Divestitures and Acquisitions | Note 2. Divestitures and Acquisitions Coffee Business Transactions: On July 2, 2015, we completed transactions to combine our wholly owned coffee businesses (including our coffee portfolio in France) with those of D.E Master Blenders 1753 B.V. (“DEMB”) to create a new company, Jacobs Douwe Egberts or JDE. We now hold a 43.5% equity interest in JDE and Acorn Holdings B.V., owner of DEMB, holds a 56.5% share. In connection with the transaction, we recorded a preliminary pre-tax gain of $7.1 billion (or $6.9 billion after-taxes) on the contribution of our global coffee businesses during the three months ended September 30, 2015. In addition, we recorded approximately $1 billion of net gains on currency exchange forward contracts related to the hedging of proceeds for the transaction as described further below in this Note. The consideration we received to date for our coffee businesses consists of €3.8 billion of cash ($4.2 billion U.S. dollars as of July 2, 2015), a 43.5 percent equity interest in JDE and $1.1 billion in receivables related to estimated sales price adjustments and tax formation cost payments expected to be paid in 2016. During the third quarter, we also recorded $283 million of cash and receivables related to the reimbursement of costs from JDE which we incurred related to separating our coffee businesses. The cash and equity consideration we received reflects an adjustment for retaining our interest in a Korea-based joint venture, Dongsuh Foods Corporation, which was part of the original transaction and valuation. During the second quarter of 2015, we also completed the sale of our interest in a Japanese coffee joint venture, Ajinomoto General Foods, Inc. (“AGF”), which had also been considered in the original transaction and valuation. In lieu of contributing our interest in the AGF joint venture to JDE, we contributed the net cash proceeds from the sale, and the transaction did not change the consideration received for our global coffee businesses. Please see discussion of the divestiture of AGF below under Other Divestiture and Acquisitions. During the third quarter we completed a preliminary valuation of our investment in JDE as of the closing date and recorded a $4.5 billion estimated investment in JDE within equity method investments on the condensed consolidated balance sheet. We and JDE are currently in the process of finalizing the value of JDE and our investment in JDE as of the closing date. The value of our investment in JDE is also affected by the estimated sales price adjustment that will be settled in 2016. As such, the contribution proceeds we recorded, including the values for our investment in JDE and the sales price adjustment, are estimated and subject to further adjustment as we work with Acorn Holdings B.V. and JDE to address the remaining terms of the agreement. As a result, the final amount of consideration we receive and the gain we recognize on the transactions may change materially until we conclude these matters. As a result of the transaction, our snacks product categories, consisting of biscuits, chocolate, gum and candy, make up the majority of our business portfolio, contributing approximately 84% of our 2015 year to date and 85% of our 2014 net revenues after excluding coffee net revenues. By retaining a significant stake in JDE, the coffee category will continue to be significant to our results. As such, we have reflected our historical coffee results and equity earnings from JDE in results from continuing operations reflecting the fact that results from the coffee category continue to be a significant part of our net earnings and strategy going forward. Additionally, we recorded currency-related net gains of $29 million in the three months and $436 million in the nine months ended September 30, 2015 and $420 million in the three months and $413 million in the nine months ended September 30, 2014 due to currency exchange forward contracts related to the receipt of the coffee business transaction proceeds and the subsequent transfers of these funds to our subsidiaries, as detailed below. To lock in an expected pre-tax U.S. dollar value of approximately $5 billion related to the estimated €4 billion cash receipt upon closing, we entered into currency exchange forward contracts beginning in May 2014, when the transaction was announced. We recognized a $19 million gain on the final settlement of the forward contracts during the three months ended September 30, 2015 and a net gain of $405 million on these contracts during 2015. In 2014, we recognized $420 million of gains in the three months and $413 million in the nine months ended September 30, 2014. The currency hedge gains and losses were recorded in interest and other expense / (income). Cumulatively over 2014 and through the final settlement of the forward contracts on July 6, 2015, we realized aggregate net gains and received cash of approximately $1.0 billion on these currency exchange forward contracts. In addition to the receipt of $4.2 billion of cash consideration to date, we received $1 billion of cash from realized hedges for a total of $5.2 billion of cash received to date related to the coffee business transactions. During the second quarter of 2015, we entered into currency exchange forward contracts to hedge a portion of the cash payments to be made to our subsidiaries in multiple countries where coffee net assets and shares were deconsolidated. During July 2015, we settled these forward contracts with a notional value of €1.6 billion and realized a net loss of $4 million in the three months ended and a net gain of $17 million in the nine months ended September 30, 2015. In connection with transferring the funds to our subsidiaries that deconsolidated net assets and shares, we incurred additional currency gains of $14 million in the third quarter. These currency-related gains and losses were recorded within interest and other expense / (income). Our coffee business results are reflected in our consolidated financial statements for all periods prior to the July 2, 2015 closing date. The pre-tax earnings of the coffee businesses were:
|  | For the Three Months Ended |  |  | For the Nine Months Ended |
|  | September 30, |  |  | September 30, |
|  | 2015 |  |  | 2014 |  |  | 2015 |  |  | 2014 |
|  | (in millions) |
Earnings before income taxes |  | $ | – |  |  | $ | 184 |  |  | $ | 342 |  |  | $ | 494 |
We also incurred incremental expenses related to readying our global coffee businesses for the transactions that totaled $54 million in the three months and $239 million in the nine months ended September 30, 2015 and $10 million in the three months and $15 million in the nine months ended September 30, 2014. These expenses were recorded within asset impairment and exit costs and selling, general and administrative expenses of primarily our Europe and Eastern Europe, Middle East and Africa (“EEMEA”) segments and within general corporate expenses. Prior to the July 2, 2015 closing, we received conditional approval for the transaction from the European Commission following their antitrust evaluation and made significant progress on our consultations with Work Councils and employee representations. The European Commission’s ruling was conditioned upon JDE’s divestiture of the majority of the EU-based Carte Noire business and DEMB’s Merrild business, primarily in France and Denmark. Those businesses have been transferred to JDE. JDE will complete the sale of these businesses in line with the European Commission agreements. As these businesses were recorded at their fair value as of July 2, 2015 reflecting the then pending sales values, we did not and will not record any gain or loss on the sale of these businesses in our share of JDE’s earnings. On July 2, 2015, we deconsolidated the following assets and liabilities:
|  | As of July 2, |
|  | 2015 |
|  | (in millions) |
Assets |  |  |  |
Cash and cash equivalents |  | $ | 488 |
Trade receivables |  |  | 468 |
Other receivables |  |  | 24 |
Inventories, net |  |  | 469 |
Deferred income taxes |  |  | 6 |
Other current assets |  |  | 44 |
Current assets |  |  | 1,499 |
Property, plant and equipment, net |  |  | 751 |
Goodwill |  |  | 1,664 |
Intangible assets, net |  |  | – |
Other assets |  |  | 35 |
Noncurrent assets |  |  | 2,450 |
Total assets |  | $ | 3,949 |
Liabilities |  |  |  |
Accounts payable |  | $ | 438 |
Accrued marketing |  |  | 290 |
Accrued employment costs |  |  | 29 |
Other current liabilities |  |  | 63 |
Current liabilities |  |  | 820 |
Deferred income taxes |  |  | 63 |
Accrued pension costs |  |  | 146 |
Other liabilities |  |  | 4 |
Noncurrent liabilities |  |  | 213 |
Total liabilities |  | $ | 1,033 |
Net assets deconsolidated |  | $ | 2,916 |
Additionally, we recorded pension settlement losses of $49 million related to our historical coffee businesses within accumulated other comprehensive losses. Other Divestiture and Acquisitions: On July 15, 2015, we acquired an 80% interest in a biscuit operation in Vietnam, which is now a subsidiary within our Asia Pacific segment. Total cash paid to date for the biscuit operation, intellectual property, non-compete and consulting agreements was 11,843 billion Vietnamese dong ($543 million U.S. dollars as of July 15, 2015). We have made or expect to make the following cash payments in connection with the acquisition:
| • |  | On November 10, 2014, we deposited $46 million in escrow upon signing the purchase agreement.
| • |  | On July 15, 2015, we made a 9,122 billion Vietnamese dong ($418 million U.S. dollars as of July 15, 2015) payment for the biscuit operation, a $44 million additional escrow deposit and a 759 billion Vietnamese dong ($35 million U.S. dollars as of July 15, 2015) partial payment for the non-compete and continued consulting agreements.
| • |  | Subject to the satisfaction of final conditions, including the resolution of warranty or other claims or purchase price adjustments, we expect to release previously escrowed funds of $90 million for the remaining 20% interest in the biscuit operation and to make a final payment of 759 billion Vietnamese dong ($35 million U.S. dollars as of July 15, 2015) for the non-compete and consulting agreements. We anticipate resolution of these conditions by the end of the third quarter of 2016.
We are in the process of completing the valuation work for the acquired net assets. We have recorded a preliminary allocation of the consideration paid including $10 million to inventory, $35 million to property, plant and equipment, $17 million to other net liabilities and $480 million of estimated goodwill. We recorded the non-compete and consulting agreements as prepaid contracts within other current and non-current assets and they will be amortized into net earnings over the remaining contract terms. The acquisition added $70 million in incremental net revenues and $16 million in incremental operating income for the quarter. Additionally, we recorded acquisition costs of $6 million for the three months and $7 million for the nine months ended September 30, 2015 and integration costs of $4 million for the three months and $5 million for the nine months ended September 30, 3015 within selling, general and administrative expenses. On April 23, 2015, we completed the divestiture of our 50 percent interest in AGF, our Japanese coffee joint venture, to our joint venture partner, which generated cash proceeds of 27 billion Japanese yen ($225 million U.S. dollars as of April 23, 2015) and a pre-tax gain of $13 million (after-tax loss of $9 million). Upon closing, we divested our $99 million investment in the joint venture, $65 million of goodwill and $41 million of accumulated other comprehensive losses. We also incurred approximately $7 million of transaction costs. On February 16, 2015, we acquired a U.S. snacking company, Enjoy Life Foods, within our North America segment. We paid cash and settled debt totaling $81 million in connection with the acquisition. Upon finalizing the valuation of the acquired net assets during the second quarter, as of June 30, 2015, we had recorded an $81 million purchase price allocation of $58 million in identifiable intangible assets, $20 million of goodwill and $3 million of other net assets. The acquisition-related costs and operating results of the acquisition were not material to our condensed consolidated financial statements as of and for the three and nine months ended September 30, 2015.

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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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