7. BUSINESS COMBINATIONS

On July 25, 2011 Pirelli Tyre S.p.A., Russian Technologies and Fleming Family & Partners Asset Management Holdings Limited signed a joint-venture agreement to form a NewCo (E-Volution Tyre B.V.) whose shareholdings are as follows: Pirelli Tyre S.p.A. 50%, Russian Technologies 25% + 1 share, Fleming Family & Partners 25% - 1 share.

According to the clauses of the joint venture agreement and Pirelli’s role as lead shareholder in the venture (with that role also being stipulated in the joint venture agreement), the company E-Volution Tyre B.V. is subject to the form of control envisaged in IAS 27 (Consolidated and Separate Financial Statements). Therefore, it has been consolidated on a line-by-line basis in the financial statements at December 31, 2011, even though its shareholding does not exceed 50%.

The joint venture agreements also envisage that Pirelli may increase its shareholding from 50% to 75% by means of a three-year put and call option on the present and possible future capital contributions made by the shareholder Fleming Family & Partners.

Also on July 25, 2011, Pirelli Tyre S.p.A. and Russian Technologies, on the one side, and Sibur Holding, on the other, signed a framework agreement that identifies the assets to be transferred to the joint venture. This joint venture will be the principal entity responsible for management of the activities that can be converted back to Pirelli standards in the car and light truck sector in Russia, pursuant to the memorandum of understanding (MOU) signed on November 26, 2010. The agreement concerns two production sites (Kirov and Voronezh) that will allow the joint venture to produce about 11 million units by 2014. These assets will be transferred in exchange for a total consideration of euro 222 million (before any adjustments), with the obligation being split between the partners in proportion to their shareholdings and an outlay of euro 55 million in 2011 and euro 167 million in 2012.

In accordance with the agreement signed on July 25, 2011, on December 14, 2011, the company E-Volution Tyre LLC, which is the newly incorporated Russian holding company and 100% owned by E-Volution Tyre B.V., acquired the first of the two production sites covered by the agreement (Kirov), through the purchase from Sibur Holding of 100% of the companies OJSC Kirov Tyre Plant and LLC Amtel-Russian Tyres (the legal entity that owns the intellectual property). The Kirov plant currently has a production capacity of over 7 million units in the car and light truck segment.

The acquisition has led to the recognition of goodwill for euro 86,127 thousand, calculated on a provisional basis as shown below:

(in thousands of euro)
  Total outlay 122,000
  Financial receivable towards the acquired company OJSC Kirov (27,357)
  Estimated price adjustment (9,140)
  Earn out 10,000
A Total consideration 95,503
  Property, plant and equipment 18,090
  Intangible assets 155
  Work in progress and other assets 474
  Deferred tax assets 86
  Inventories 14,264
  Trade receivables 5,930
  Other receivables 1,687
  Cash and cash equivalents 1,766
    42,452
 
  Trade payables (2,535)
  Other payables (713)
  Provision for deferred tax liabilities (56)
  Financial payables (29,772)
    (33,076)
 
B Total acquired net identifiable assets 9,376
A-B Goodwill 86,127

 

Since the acquisition was completed on December 14, 2011, and thus shortly before approval of these financial statements, the value of the acquired net assets indicated above, euro 9,376 thousand, must be considered provisional. Pursuant to IFRS 3 (Business Combinations), purchase price allocation to the fair value of the acquired assets and liabilities, and consequent determination of the final value of the goodwill resulting from the acquisition must be completed no more than 12 months after the acquisition (December 14, 2012).

Subsequent to acquisition of the Voronezh plant and in any case not after March 31, 2012, it is expected that the price will be modified in accordance with the provisions of the agreement, mainly in consequence of any changes in the value of the components of net invested capital or if the amount of financial debt differs from what has been authorised. The best estimate of the price adjustment at the annual report approval date is that the price will be reduced by euro 9,140 thousand.

The contract also envisages an earn out for a maximum of euro 15 million to be paid to the seller within 30 days after the date on which the annual financial report of the acquired company at December 31, 2012 will be made available. Its amount will be the greater of:

  • 20% of the excess value of the 2012 contribution margin of the acquired company OJSC Kirov Tyre Plant over USD 70 million;
  • 40% of the excess value of the 2012 operating income of the OJSC Kirov Tyre Plant over USD 22 million.

On the basis of the various market scenarios that have been elaborated, the estimated value of the earn out at December 31, 2011 is euro 10 million.

The costs related to the deal and incurred during the year total euro 6,502 thousand, have been allocated to the income statement under “other costs” and mainly refer to various types of consultancy services that were necessary for best appraisal of the acquired site, and to determine the financial sustainability of the investment.