Blue Label Telecoms

Investments in and loans to venture capital associates and joint venture

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	2018 Audited R’000		2017 Audited R’000
Venture capital associates and joint venture	142 981		291 550
Loan to venture capital associates and joint venture	134 854		252 615
	277 835		544 165

IAS 28 exemption with respect to Oxigen Services India, Oxigen Online and 2DFine Holdings Mauritius

The exemption available in IAS 28 – Investments in Associates and Joint Ventures has been applied to the investment in Oxigen Services India, Oxigen Online and 2DFine 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 difference 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 Group income statement. Any additional changes in the fair value have been recognised in the 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 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 is an investment holding company that holds an effective interest in Oxigen Services India and Oxigen Online.

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

Accordingly, in accordance with IAS 28 – Investments in Associates and Joint Ventures Oxigen Services India, Oxigen Online and 2DFine are viewed as venture capital investments which have been accounted for at fair value through profit and loss from 30 November 2016 at which date equity accounting ceased, in line with IFRS 13 – Fair Value Measurement.

The loans to 2DFine have been impaired as the only asset that 2DFine holds that can be utilised to recover this loan is the investment in Oxigen Services and Oxigen Online. The fair values have decreased significantly in the current year. B Levy and M Levy have signed personal sureties relating to a portion of the irrecoverable portion of the loan.

The fair value of Oxigen Services India, Oxigen Online and the 2DFine group as at 31 May 2018 has declined due to lack of funding. This has resulted in Oxigen Online and 2DFine being carried at Rnil. Although negotiations remain in progress with potential investors, until such time as a transaction is completed, the lack of cash resources will inhibit its propensity for growth through the roll out of a significant number of micro-ATM terminals. The latter is the essence of its ability to generate growth in the market value of the investment therein and is the cause of the necessity to reduce the fair value of the Oxigen group.

Fair value estimate

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.

Management use this fair value information to monitor the performance of this investment as it relates to the revised investment and exit strategies. Decisions relating to e-wallet acquisition, retention and exit strategy, are discussed at monthly management meetings, focusing predominantly on the inputs (e.g. capital spend and customer acquisition/retention spend) that drive the fair value.

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

In terms of IFRS 13 – Fair Value Measurement, the market approach has been utilised in determining the fair value of the Indian entities. This approach utilises relevant information generated by similar market transactions that have been concluded by comparable businesses. The valuation is based on a multiple applied to gross revenue, based on the same principles adopted by similar business to that of the Oxigen Services group, that was recently disposed of. This differs from the discounted cash flow approach applied previously, as the market approach provided the Group with more reliable evidence to support the valuation. The revenue multiple of 4.3 was applied in determining the fair value.

In the prior year the discount rate and terminal growth rate used in calculating the fair values were 27% and 5% respectively.

In the prior year the main inputs into the cash flow models were the expected cash flows relation to capital expenditure as well as cash flows relating to customer acquisition and engagement spend. Capital expenditure in Oxigen Services India and Oxigen Online was 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 was forecast to increase aggressively from R103 million to R2 575 million in the prior year valuation models.

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

Unobservable input	Change  to inputs		Movement  in fair value  R'000
Revenue multiple	0.2		11 513
	0.1		5 803
	(0.1)		(5 803)
	(0.2)		(11 513)
	(0.3)		(17 222)