| Acquisitions and Dispositions | 2. Acquisitions and Dispositions
Acquisition of CPO Commerce, Inc.
On May 30, 2014, Essendant Co. completed the acquisition of CPO, a leading online retailer of brand name power tools and equipment. The acquisition of CPO significantly expanded the Company’s digital resources and capabilities to support resellers as they transition to an increasingly online environment. CPO’s expertise will strength en Essendant ’s ability to offer features like improved product content, real-time access to inventory and pricing, digital marketing and merchandising, and an enhanced digital platform to our resellers and manufacturing partners.
The purchase price was $ 37.8 million, including $ 5. 5 million related to the estimated fair val ue of contingent consideration. The contingent consideration ultimately paid will be determined based on CPO’s sales during a three-year period immediately following the acquisition date. The final payments related to the contingent consideration will be determined by actual achievement in the earn-out periods and will be between zero and $ 10 million. Any changes to the estimated fair value after the original purchase accounting was completed were recorded in “warehousing, marketing and administrative ex penses” in the period in which the change occurred . The Company financed the 100 % stock acquisition with borrowings under the Company’s available committed bank facilities.
The fair value of the assets and liabilities acquired were determined using various valuation methods including selling price, a market approach, and discounted cash flows using both an inco me and cost approach.
T he final al location of the purchase price wa s as follows (amounts in thousands):
Purchase price, net of cash acquired
$
32,225
Accounts receivable
$
(2,956
)
Inventories
(13,051
)
Other current assets
(269
)
Property, plant and equipment, net
(488
)
Intangible assets
(12,800
)
Total assets acquired
(29,564
)
Accounts payable
16,911
Accrued liabilities
2,580
Deferred income taxes
3,453
Other long-term liabilities
90
Total liabilities assumed
23,034
Goodwill
$
25,695
The purchased id entifiable intangible assets were as follows (amounts in thousands):
Total
Estimated Life
Customer relationships
$
5,200
3 years
Trademark
7,600
15 years
Total
$
12,800
Acquisition of MEDCO
On October 31, 2014 , Essendant Co. completed the acquisition of all of the capital stock of Liberty Bell Equipment Corp., a United States wholesaler of automotive aftermarket tools and equipment, and its affiliates (collectively, MEDCO) including G2S Equip e ment de Fabrication et d’Entretien ULC, a Canadian wholesaler. MEDCO advances a key pillar of the Company’s strategy, which is to diversif y into higher growth and margin channels and categories. It also brings expanded categories and services to customers.
The purchase price was $ 1 50. 4 million, including $ 4. 7 million related to the estimated fair value of contingent consideration . The contingent consideration ultimately paid will be determined based on MEDCO’s sales and EBITDA during a three- year period immediately following the acquisition date. Additionally, $ 6.0 million was reserved as a payable upon completion of an eighteen month indemnification period. The final payments related to the contingent consideration will be determined by actual achievement in the earn-out periods and will be between zero and $ 10 million. Any changes to the estimated fair value after the original purchase accounting is completed will be recorded in “warehousing, marketing and administrative expenses” in the period in which a change occurs. This acquisition was funded through a combination of cash on hand and cash available under the Company’s committed bank facilit ies .
The Company has developed a preliminary estimate of the fair value of assets acquired and liabilities assumed for purposes of allocating the purchase price. The estimate is subject to change as the valuation activities are completed. The fair value of the assets and liabilities acquired were estimated using various valuation methods including estimated selling price, a market approach, and discounted cash flows using both an income and cost approach.
At June 30 , 2015, the preliminary al location of the purchase price wa s as follows (amounts in thousands):
Purchase price, net of cash acquired
$
145,873
Accounts receivable
$
(44,815
)
Inventories
(55,491
)
Other current assets
(1,299
)
Property, plant and equipment, net
(4,408
)
Other assets
(442
)
Intangible assets
(39,330
)
Total assets acquired
(145,785
)
Accounts payable
32,383
Accrued liabilities
5,254
Deferred income taxes
1,333
Other long-term liabilities
52
Total liabilities assumed
39,022
Goodwill
$
39,110
The purchased id entifiable intangible assets were as follows (amounts in thousands):
Total
Estimated Life
Customer relationships
$
36,920
4-15 years
Trademarks
2,410
1.5-15 years
Total
$
39,330
Any changes to the preliminary allocation of the purchase price, some of which may be material, will be allocated to residual goodwill.
Assets Held for Sale
On February 10, 2015, the Company approved a plan to sell its subsidiary in Mexico , which is not strategic to the Company . The Company plans to dispose of the entity in 2015. As of the approval date, in accordance with Accounting Standards Codification (ASC) 360-10-45-9 Property, Plant, and Equipment , the Mexican subsidiary met all of the criteria to be classified as a held-for-sale asset disposal group . In accordance with ASC 350-20-40 , Intangibles – Goodwill and Other , the Company allocated a proportionate share of the goodwill balance from the office product and janitorial and breakroom supply reporting unit based on the subsidiary’s relative fair value to the reporting unit and performed an impairment test for the allocated goodwill utilizing the cost approach to value the entity. Based upon the impairment test, the $ 3.3 million of goodwill allocated to the subsidiary was determined to be fully impaired. Additionally, in conjunction with classifying the subsidiary as a held-for-sale asset disposal group, the Company revalued the subsidiary to fair value using the cost-approach method less the estimated cost to sell. The carrying value, including a $ 10.1 million cumulative foreign currency translation adjustment, of the disposal group was then compared to the fair value less the estimated cost to sell , resulting in a pre-tax impairment loss of $ 10.1 million. The goodwill impairment of $3.3 million, the held-for-sale impairment of $ 10.1 million and the $ 0.1 million estimated cost to sell we re recorded in the first quarter of 2015 within “warehousing, marketing and administrative expenses.” During the second quarter, the Company recorded an additional $ 1.4 million within “warehousing, marketing and administrative expenses.” A dditional financial statement impacts may occur during the remainder of 2015 as this transaction is completed .
As of June 30 , 2015, the carrying amounts, excluding intercompany accounts, of the Mexican subsidiary by major classes of assets and liabilities included in th e Consolidated Balance Sheet were as follows (in thousands):
Amount
Assets held for sale:
Cash and cash equivalents
$
4,119
Accounts receivable, less allowance for doubtful accounts
6,720
Inventories
6,527
Other current assets
418
Net property, plant equipment
110
Other assets
657
Held-for-sale valuation allowance
(10,671
)
Total assets held for sale
$
7,880
Liabilities held for sale:
Accounts payable
3,447
Accrued liabilities
3,184
Other long-term liabilities
538
Total liabilities held for sale
$
7,169
Agreement to Purchase Nestor Sales LLC
On July 14 , 2015, Essendant Co signed an agreement to acquire Nestor Sales LLC, a leading wholesaler and distributor of tools, equipment and supplies to the transportation industry. The all cash purchase price is $ 38.5 million, subject to closing adjustments. This acquisition accelerates the Company’s growth in the automotive aftermarket, complements the Company’s existing industrial offerings while providing access to new customer segments, and advances a key str ategic pillar to diversify into higher growth and ma rgin channels and categories. The acquisition is expected to be completed in t he third quarter of 2015, subject to customary closing conditions. This acquisition will be funded through a combination of c ash on hand and cash available under our revolving credit facility. |
