Blue Label Telecoms

Investments and loans to venture capital associates and joint venture

For the year ended 31 May

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	2017 Reviewed R’000
Venture capital associates and joint venture	291 550
Loan to venture capital associates and joint venture	252 615
	544 165

The exemption available in IAS 28 – Investments in Associate and Joint Ventures has been applied to the investment in Oxigen Services India, Oxigen Online and 2DFine Holdings Mauritius from 30 November 2016 and the investment is accounted for in accordance with IAS 39 – Financial Instruments: Recognition and Measurement at fair value with changes in fair value recognised in profit or loss. The differential between the carrying amount of the investment (previously equity accounted for) and the fair value at this date is reflected as a gain on associate measured at fair value in the reviewed condensed Group statement of comprehensive income. Any additional changes in the fair value between 30 November 2016 and year-end have also been recognised in the reviewed condensed Group statement of comprehensive income.

Oxigen Services India was demerged into two separate entities with effect from 1 June 2016. This was done in line with the Group’s exit strategy to improve the marketability of these entities to potential investors.

Prior to 30 November 2016, the investment in Oxigen Services India was of a strategic nature as it was it was expected to emulate the business model of the South African distribution operations. The original decision to invest in this business was because it was strategically aligned with other Blue Label distribution businesses in South Africa. However, its profile has changed from that of the traditional Group business to one of generating growth in the market value of the investment with a view to unlocking the Group’s share thereof. With the advent of its change in focus to financial services through wallet subscription, it is no longer strategically aligned with the other business units of the Group and is unlikely to generate profitability in the short to medium term. However, the market value of the company is expected to increase exponentially in conjunction with its growth in wallet subscribers. This in turn creates the potential to unlock the investment in value in the future and the Group is pursuing this new strategy with respect to its investment in Oxigen Services India. In line with the Group’s exit strategy Oxigen Services India was demerged into two separate entities with effect from 1 June 2016. This was done to improve the marketability of these entities to potential investors.

2DFine Holdings Mauritius is an investment holding company that holds an interest in Oxigen Services India and Oxigen Online.

Consequently, management review the results and operations of Oxigen Services India, Oxigen Online and 2DFine Holdings Mauritius on a fair value basis as opposed to the profits/losses that it generates. In addition, management have established an exit strategy that looks to realise this fair value in the foreseeable future.

Accordingly Oxigen Services India, Oxigen Online and 2DFine Holdings Mauritius are viewed as a venture capital investment which, in accordance with IAS 28 – Investments in Associates and Joint Ventures has been accounted for at fair value through profit and loss from 30 November 2016 at which date equity accounting ceased.

Fair value estimate
The fair value of the investment in our venture capital associate Oxigen Services India and Oxigen Online are not traded in an active market and is therefore determined by the use of a valuation technique. An independent third party has performed a valuation using the discounted cash flow model taking into account the current and projected performance of Oxigen Services India and Oxigen Online. These calculations use cash flow projections based on financial budgets approved by the Board of Directors for the forthcoming year and forecasts for ten years which are based on assumptions of the business, industry and economic growth. Cash flows beyond this period are extrapolated using terminal growth rates, which do not exceed the expected long-term economic growth rate.

The discount rate and terminal growth rate used in calculating the fair values are 27% and 5% respectively. Capital expenditure in Oxigen Services India and Oxigen Online is expected to range between R166 million and R311 million on an annual basis. Customer acquisition and engagement spend for Oxigen Services India and Oxigen Online increases aggressively from R103 million to R2 575 million.

The fair value of the 2DFine Group is based on its share of the fair value of Oxigen Services India and Oxigen Online less the liabilities of the 2DFine Group.

The finance department of the Group includes a team that outsources the valuations to qualified independent third party valuation specialists required for financial reporting purposes, including level 3 fair values. This team reports directly to the Financial Director (FD) and the Audit, Risk and Compliance Committee (ARCC). Discussions of valuation processes and results are held between the FD, ARCC and the valuation team at least once every six months, in line with the Group’s reporting periods.

The investments in our venture capital associates and joint venture are level 3 valuations in the fair value hierarchy.

The following table summarises the quantitative information about the significant unobservable inputs used in the level 3 fair value measurement for this investment.

	Change to inputs			Movement in fair value
				Oxigen Services India Private Limited			Oxigen Online Services Private Limited			2DFine Group1
Unobservable inputs	%			R’000			R’000			R’000
Discount rate	+0.5% -0.5%			(16 489) 17 575			(9 938) 10 573			(10 831) 11 531
Terminal growth rate	+1% -1%			5 172  (4 625)			2 478  (2 203)			3 127  (2 791)
Customer acquisition and engagement spend	+1% -1%			(5 257) 5 257			(4 348) 4 348			(3 947) 3 947
Capital expenditure	+1% -1%			(3 000) 3 000			(292) 292			(1 333) 1 333

1	2DFine Group consists of 2DFine Holdings Mauritius and 2DFine Investments Mauritius.