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Business Combinations

6 Months Ended

Jun. 30, 2023

5. Business Combinations

(a)	IAA Acquisition

On March 20, 2023, the Company completed its acquisition of IAA for a total purchase price of approximately $6.6 billion. The Company acquired IAA to create a leading omnichannel marketplace for vehicle buyers and sellers.

On November 7, 2022, the Company had entered into an Agreement and Plan of Merger and Reorganization, which was subsequently amended on January 22, 2023 (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, IAA stockholders received $12.80 per share in cash and 0.5252 shares of the Company for each share of IAA common stock they owned (the “Exchange Ratio”). As such, the Company paid $1.7 billion in cash consideration and issued 70.3 million shares of its common stock. In addition, the Company repaid $1.2 billion of IAA’s net debt, which included all outstanding borrowings and unpaid fees under IAA’s credit agreement and $500.0 million principal amount of IAA senior notes, at a redemption price equal to 102.75% of the principal amount plus accrued and unpaid interest.

IAA’s outstanding equity awards were also cancelled and exchanged into equivalent outstanding equity awards relating to the Company’s common stock, based on the equity award exchange ratio of 0.763139.

The purchase price was determined as follows:


Cash consideration	$	1,714.2
Fair value of common shares issued		3,713.0
Fair value of exchanged IAA equity awards attributable to pre-combination service		13.1
Reimbursement of sell-side acquisition costs		48.8
Repayment of IAA net debt		1,157.1
Total fair value of consideration transferred	$	6,646.2

The acquisition was accounted for in accordance with ASC 805, Business Combinations. The identifiable assets acquired and liabilities assumed were recorded at their estimated preliminary acquisition date fair values. The excess purchase price over the fair values of identifiable assets and liabilities is recorded as goodwill. The following table summarizes the preliminary allocation of the purchase price to the fair value of assets acquired and liabilities assumed.

5. Business Combinations (continued)

(a)	IAA Acquisition (continued)

IAA Preliminary Purchase Price Allocation



Purchase price	$	6,646.2

Assets acquired:
Cash and cash equivalents		164.9
Trade and other receivables		499.2
Prepaid consigned vehicle charges		8.7
Inventory		57.6
Other current assets		29.2
Income taxes receivable		1.9
Property, plant and equipment		634.3
Operating lease right-of-use assets		1,272.2
Other non-current assets		34.8
Intangible assets		2,447.7

Liabilities assumed:
Auction proceeds payable		60.7
Trade and other liabilities		259.2
Current operating lease liability		78.1
Income taxes payable		6.3
Long-term operating lease liability		1,166.1
Other non-current liabilities		22.4
Deferred tax liabilities		628.3

Fair value of identifiable net assets acquired		2,929.4
Goodwill acquired on acquisition	$	3,716.8

The following table summarizes the preliminary fair values of the identifiable intangible assets acquired:


	Preliminary fair value		Weighted average
Asset	at acquisition		amortization period
Customer relationships	$	2,035.9	12 years
Developed technology		245.2	4 years
Trade names and trademarks		166.6	5 years
Total	$	2,447.7	10.7 years

The purchase price has been preliminarily allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. During the period ended June 30, 2023, the Company revised and updated certain estimated fair values of assets acquired and liabilities assumed. The fair value estimates of assets acquired and liabilities assumed is still preliminary pending the completion of various items, including obtaining further information regarding the identification and completeness of all assets acquired and liabilities assumed and completing certain review procedures in the finalization of various independent valuations of the assets acquired and liabilities assumed.

5. Business Combinations (continued)

(a)	IAA Acquisition (continued)

Certain of the more significant balances that are not yet finalized, but which have been revised in these interim unaudited condensed consolidated interim financial statements during the second quarter from those previously reported in the first quarter, include the valuation of property, plant and equipment, intangible assets, operating lease right-of-use assets and related lease liabilities, and related income tax considerations. Accordingly, management considers the balances above to be preliminary, and there could be adjustments to the consolidated financial statements in subsequent periods, including changes to depreciation and amortization expense related to the property, plant, and equipment and intangible assets acquired and their respective useful lives, among other adjustments. In addition, management has not completed the allocation of goodwill acquired to its reporting units.

The final determination of the fair values of the assets acquired and liabilities assumed will be completed within the measurement period of up to one year from the acquisition date.

Measurement period adjustments

Certain measurement period adjustments were recorded in these consolidated financial statements due to the receipt of additional information and updated preliminary valuation reports. Significant adjustments during the three months ended June 30, 2023, included:

(i)

$19.7 million increase to operating right-of-use assets, $28.6 million decrease to property, plant, and equipment, and a $107.7 million increase to intangible assets related to updated valuations due to revised assumptions and information included in the preliminary valuation reports;

(ii)

$24.1 million increase to deferred income tax liabilities related to the adjustments noted in (i) above, among others; and

(iii)

$72.0 million decrease to goodwill related to the adjustments noted in (i) and (ii) above, and other less significant adjustments.

During the quarter ended June 30, 2023, the Company recorded $0.7 million of depreciation, $0.4 million of amortization, and $0.1 million of cost of services, which would have been recognized in the three months ended March 31, 2023 had the measurement period adjustments been recognized as of the acquisition date.

Goodwill

Goodwill recognized includes synergies expected to be achieved from the operations of the combined company, the assembled workforce of IAA and intangible assets that do not qualify for separate recognition. Expected synergies include both increased revenue opportunities and the cost savings from the planned integration of platform infrastructure, facilities, personnel, and systems. The transaction is considered a non-taxable business combination and the goodwill is not deductible for tax purposes.

5. Business Combinations (continued)

(a)	IAA Acquisition (continued)

Contributed Revenue and Net Income

The results of IAA’s operations are included in these unaudited condensed consolidated interim financial statements from the date of acquisition. For the three months ended June 30, 2023, the amount of IAA revenue and net income included in the consolidated income statement was $560.4 million and $74.0 million, respectively. From the date of acquisition to June 30, 2023, the amount of IAA revenue and net income included in the consolidated income statement was $640.4 million and $76.9 million, respectively.

The following table includes unaudited pro forma financial information that presents the combined results of operations as if the IAA acquisition, the acquisition debt financing, and certain other related transactions had occurred on January 1, 2022, the beginning of the comparable annual period.

The unaudited pro forma information includes adjustments to amortization for intangible assets acquired, adjustments to interest expense for the additional indebtedness incurred to complete the acquisition, and transaction costs. The unaudited pro forma financial information for the six months ended June 30, 2022 also includes one-time acquisition-related expenses of $218.7 million, of which $60.0 million were IAA pre-acquisition transaction costs. The pro forma results do not include any anticipated synergies or other expected benefits of the acquisition.


	Three months ended			Six months ended
	June 30,			June 30,
	2022			2023		2022
Revenue	$	1,004.4	$	2,094.5	$	1,955.2
Net income		40.6		186.9		42.5

The unaudited pro forma information presented is for informational purposes only and is not necessarily indicative of our consolidated results of operations of the combined business had the acquisition actually occurred on January 1, 2022, nor of the results of our future operations of the combined business. The pro forma results are based on the preliminary purchase price allocation and will be updated to reflect the final amounts as the allocation is finalized during the measurement period.

5. Business Combinations (continued)

(b)	VeriTread Acquisition

On January 3, 2023, the Company acquired 8,889,766 units of VeriTread, for $25.2 million cash consideration from its existing unitholders and acquired another 1,056,338 units through an investment of $3.0 million cash. As a result, the Company increased its investment in VeriTread to 75% and obtained control of VeriTread pursuant to an amended operating agreement on January 18, 2023. Immediately prior to the acquisition, the Company owned 11% of VeriTread, with an acquisition date fair value of $4.3 million based on the per unit purchase price, and therefore, upon remeasurement of its previously held interest, the Company recorded a gain of $1.4 million in other income, net at acquisition. VeriTread is a transportation technology company that provides an online marketplace solution for open deck transport, connecting shippers and service providers.

Concurrently, the Company entered into a put/call agreement with one of the minority unitholders of VeriTread for its remaining units, another 21% ownership interest. Pursuant to this agreement, the minority unitholder has rights, in certain circumstances, to put or sell its remaining units of VeriTread to the Company, subject to VeriTread achieving certain performance targets at a pre-determined value or fair value, depending on the timing and targets achieved. The Company also has the right to call or purchase the remaining units of the minority unitholder upon achievement of certain integration milestones at fair value. The redeemable non-controlling interest is classified in temporary equity on the interim condensed consolidated balance sheet, as the minority unitholder of VeriTread can put the remaining units to the Company for cash upon the achievement of certain performance targets, which is not within the control of the Company and is considered probable. An additional non-controlling interest of 4% held in VeriTread is classified within equity as that interest does not contain put/call options. At the end of each reporting period, if redemption of the redeemable non-controlling interest continues to be probable, then the carrying value of the redeemable non-controlling interest is adjusted to its estimated redemption value. The valuation of the redemption value at acquisition, and at each reporting period, requires management to assess whether VeriTread and the Company will be able to successfully achieve certain integration milestones and performance targets over a three-year period. At June 30, 2023 the Company determined that redemption of the redeemable non-controlling interest remains probable and that there has been no material change to the estimated redemption value.

The acquisition was accounted for in accordance with ASC 805, Business Combinations. The following table summarizes the preliminary allocation of the purchase price to the fair value of assets acquired and liabilities assumed.

VeriTread Preliminary Purchase Price Allocation


Total cash consideration paid	$	28.1
Fair value of previously held interest		4.3
Purchase price	$	32.4

Assets acquired:
Cash and cash equivalents		3.4
Trade and other receivables, and other current assets		0.9
Intangible assets		14.7

Liabilities assumed:
Trade and other liabilities		1.1

Fair value of identifiable net assets acquired		17.9

Redeemable non-controlling interest		(8.9)
Non-controlling interest		(1.8)

Goodwill acquired on acquisition	$	25.2

5. Business Combinations (continued)

(b)	VeriTread Acquisition (continued)

The following table summarizes the preliminary fair values of the identifiable intangible assets acquired:


	Preliminary fair value		Weighted average
Asset	at acquisition		amortization period
Customer relationships	$	7.2	5 years
Software and technology assets		7.1	7 years
Trade names and trademarks		0.4	2 years
Total	$	14.7	5.9 years

The amounts included in VeriTread’s preliminary purchase price allocation are preliminary in nature and are subject to adjustment until management finalizes the valuation of intangible assets acquired. The final determination of the fair values of certain assets and liabilities will be completed within the measurement period of up to one year from the acquisition date. Adjustments to the preliminary values during the measurement period may impact the amounts recorded as assets and liabilities with a corresponding adjustment to goodwill and will be recognized in the period in which the adjustments are determined.

The results of VeriTread’s operations are included in these consolidated financial statements from the date of acquisition. Pro forma results have not been presented as such financial information would not be significantly different from historical results.

Goodwill

Goodwill relates to benefits expected from the acquisition of VeriTread’s business, its assembled workforce and associated technical expertise, as well as anticipated synergies from applying VeriTread’s transportation platform, network of transport carriers, equipment database and services to the Company’s customer base. This acquisition is expected to accelerate the Company’s marketplace strategy, which brings services, insights, and transaction solutions together to improve the overall customer experience. The transaction is considered a non-taxable business combination and the goodwill is not deductible for tax purposes.

(c)	Terminated Euro Auctions Acquisition

On August 9, 2021, the Company entered into a Sale and Purchase Agreement (“SPA”) pursuant to which it agreed to purchase Euro Auctions Limited, William Keys & Sons Holdings Limited, Equipment & Plant Services Ltd, and Equipment Sales Ltd. (collectively, “Euro Auctions”), each being a private limited company incorporated in Northern Ireland (the “Euro Auctions Acquisition”). Under the terms of the SPA, the Company was to acquire all of the outstanding shares of Euro Auctions from their existing shareholders for approximately £775.0 million (approximately $1.02 billion) cash consideration, to be paid on closing. On April 29, 2022, the Company made a decision to discontinue the Phase 2 review by the United Kingdom’s Competition and Markets Authority (“CMA”). The SPA automatically terminated on June 28, 2022. In addition, in April 2022, the Company terminated, without cost, its deal contingent forward currency contracts and on May 4, 2022, redeemed all of the 2021 Notes (Note 18) at a redemption price equal to 100% of the original offering price of the notes, plus accrued and unpaid interest.