Discontinued operations
3G Mobile and VAS operations disposals
On 3 June 2019, BLT restructured its holdings in Cellfind Proprietary Limited (Cellfind), Viamedia Proprietary Limited (Viamedia), Airvantage Proprietary Limited (Airvantage) and AV Technology Limited (AV Technology). Prior to the restructure, BLT owned 100% of Cellfind, 60% of Airvantage SA, 60% of AV Technology and 75% of Viamedia. Malik Investments Holdings Proprietary Limited (Malik), a non-Group company, owned 25% of Viamedia. In terms of the restructure, BLT exchanged its shares in Cellfind, Viamedia, Airvantage and AV Technology for 89.51% of the shares in a new entity called Blue Label Mobile Group Proprietary Limited (BLM). Malik thereafter exchanged its 25% shareholding in Viamedia for 10.49% in BLM. Following this, Malik subscribed for a further 4.51% in BLM for R34 million, increasing its shareholding in BLM to 15% with BLT owning the remaining 85%.
On 25 September 2019, the Group announced it had entered into an agreement to dispose of its 85% shareholding in BLM as well as its 51% shareholdings in Simigenix Proprietary Limited and Panacea Proprietary Limited (together the VAS operations), to DNI 4PL Contracts Proprietary Limited (DNI), for a purchase consideration of R450 million, inclusive of loan claims, plus the amounts which BLM has disbursed towards the acquisition of 50% of Hyve as at the transaction closing date. Of the purchase consideration of R450 million, R100 million (bearing interest at prime overdraft rates plus 2% per annum compounded on a monthly basis), is contingent upon the solvency and liquidity status of Cell C being proven. There is no set date by which this needs to be proven and the consideration would only have to be proven once. Should the solvency and liquidity of Cell C never be successfully proven, then the R100 million contingent purchase price and the interest accrued thereon will be forfeited by BLT, but in lieu thereof, BLM will transfer 24% of the issued share capital of Airvantage and AV Technologies to BLT for no consideration. Prior to the effective date of the disposal of the VAS operations, Simigenix and Panacea were sold on loan account to BLM. Furthermore, the Group announced that it would dispose of 100% of the shares in 3G Mobile to DNI for a purchase consideration of R544 million (this disposal group will be referred to as 3G Mobile) and would distribute its shares in Comm Equipment Company (CEC) and 3G Mobile's loan account claim against CEC to its shareholder, TPC prior to the effective date of the disposal. The associated assets and liabilities of the VAS operations and 3G Mobile disposal groups were consequently presented as held-for-sale in the reviewed results for the half-year ended 30 November 2019.
The 3G Mobile and VAS operations were sold with effect from 14 February 2020 and 30 April 2020 respectively and are reported in the current period as discontinued operations.
Closure of WiConnect
While management had implemented a turnaround strategy at WiConnect (a fully owned subsidiary of the Group), which incorporated the strengthening of the retail management team, a refocus of product sales as well as negotiating additional rebates from the network operators and original equipment manufacturers, Covid-19 had a significant negative impact on the retail operations of WiConnect. These included increased costs of inventories as a result of a weaker rand, periods of non-trading as a result of the nationwide lockdown and consumers foregoing discretionary purchases. Given the uncertainty of the tenure of the pandemic and the resultant losses attributable thereto impacting its financial feasibility, a decision was made on 11 May 2020 to cease the operations of the WiConnect retail stores.
Significant management judgement was applied in determining whether WiConnect is a discontinued operation by assessing whether it has effectively been ceased to be used or abandoned by year-end and also whether it represents a separate major line of business or geographical area of operations or is part of a single plan to dispose of a separate major line of business or geographical area of operations. For further information regarding management's considerations in concluding that WiConnect is a discontinued operation, please refer to the information under "Critical accounting judgements and assumptions".
Financial performance of discontinued operations
Financial information relating to the various discontinued operations is set out below:
| VAS operations 1 June 2019 – 30 April 2020 R'000 |
3G Mobile 1 June 2019 – 14 February 2020 R'000 |
WiConnect 1 June 2019 – 31 May 2020 R'000 |
Total 2020 R'000 |
|||||
| Revenue and other income | 413 421 | 1 553 611 | 287 298 | 2 254 330 | ||||
|---|---|---|---|---|---|---|---|---|
| Expenses | (257 594) | (1 477 988) | (539 978) | (2 275 560) | ||||
| Other gains/(losses)* | 110 149 | (26 346) | (45 587) | 38 216 | ||||
| Profit/(loss) before taxation | 265 976 | 49 277 | (298 267) | 16 986 | ||||
| Taxation | (40 114) | (19 174) | (20 202) | (79 490) | ||||
| Profit/(loss) after taxation of discontinued operations | 225 862 | 30 103 | (318 469) | (62 504) | ||||
| (Loss)/gain on sale of the subsidiary after income tax (see below) | (43 022) | 43 550 | — | 528 | ||||
| Profit/(loss) from discontinued operation | 182 840 | 73 653 | (318 469) | (61 976) | ||||
| Exchange differences on translation of discontinued operations | 34 558 | — | — | 34 558 | ||||
| Reclassification of foreign currency translation reserve | (48 508) | (5 027) | — | (53 535) | ||||
| Other comprehensive income from discontinued operations | (13 950) | (5 027) | — | (18 977) | ||||
| Total comprehensive income/(loss) from discontinued operations | 168 890 | 68 626 | (318 469) | (80 953) | ||||
| Profit/(loss) for the period attributable to: | 182 840 | 73 653 | (318 469) | (61 976) | ||||
| Equity holders of the parent | 142 511 | 73 653 | (318 469) | (102 305) | ||||
| Non-controlling interest | 40 329 | — | — | 40 329 | ||||
| Total comprehensive income/(loss) for the period attributable to: | 168 890 | 68 626 | (318 469) | (80 953) | ||||
| Equity holders of the parent | 115 468 | 68 626 | (318 469) | (134 375) | ||||
| Non-controlling interest | 53 422 | — | — | 53 422 | ||||
| Goodwill impairments of disposal groups and discontinued operation recognised1 | (26 886) | (26 346) | (45 587) | (98 819) | ||||
| Derecognition of put option liability on the effective date of VAS operations disposal2 | 214 559 | — | — | 214 559 | ||||
| Recognition of derivative liability to the extent that the exercise price does not represent the fair value of the underlying shares2 | (77 524) | — | — | (77 524) | ||||
| Other gains/(losses) | 110 149 | (26 346) | (45 587) | 38 216 |
| * | Reconciliation of other losses is shown below. | ||||||
| 1 | In line with the requirements of IFRS 5, management performed an assessment to measure the disposal groups classified as held-for-sale at the lower of their carrying amount and fair value less cost to sell with
the following conclusions being reached:
|
||||||
| 2 | This relates to the put options for the acquisition of the remaining 40% minority interest in Airvantage and AV Technology. Prior to entering into the VAS operations disposal transaction, Blue Label accounted for the put options held by both the non-controlling shareholders in Airvantage and AV Technology. This was in line with IAS 32 paragraph 23 that requires an entity with an obligation to purchase its own equity instruments (i.e. Airvantage and AV Technology were consolidated by Blue Label, as their shares were Blue Label’s own equity instruments from a consolidated Blue Label perspective) for cash or another financial asset, to recognise such obligation as a financial liability. |
Following Blue Label’s disposal of the VAS Operations, the terms of the put option over the equity instruments in Airvantage and AV Technology have been substantially modified. In accordance with IFRS 9 this is accounted for as an extinguishment of the original put option liability and a new financial liability is recognised (derivative instrument). The resultant movement in profit or loss in included within the “Profit from discontinued operations” line item within the Group statement of comprehensive income.
Blue Label still has an obligation to acquire the shares should the non-controlling shareholders put the shares to it. As a result thereof, Blue Label recognised a derivative instrument, taking the following into consideration:
- the value of the instrument fluctuates in response to a change in the fair value of Airvantage and AV Technology;
- no initial net investment was required; and
- the put option may be exercised by the 40% minority shareholders during the 90-day period following signature of the 31 May 2020 audited results. The call option may be exercised by Blue Label for a period of 90 days after the put option expires.
The derivative financial instrument is measured at fair value through profit or loss. The amount at which the put and call options may be exercised is contractually determined based on the 31 May 2020 audited results at a six times net profit after tax multiple. Should the exercise price not represent the fair value of the underlying shares, an element of the derivative instrument would have value and as such would be recognised in Blue Label's financial statements. The determination of the extent to which the exercise price does not represent the fair value of the underlying shares involved significant management judgement. For further information in this regard, refer to "Critical accounting judgements and assumptions".
| VAS operations 2019 R'000 |
3G Mobile 2019 R'000 |
WiConnect 2019 R'000 |
Total 2019 R'000 |
|||||
| Revenue and other incomes | 364 224 | 1 713 637 | 235 940 | 2 313 801 | ||||
| Expenses | (349 174) | (1 653 151) | (234 385) | (2 236 710) | ||||
| Profit before taxation | 15 050 | 60 486 | 1 555 | 77 091 | ||||
| Taxation | (27 484) | (22 329) | 13 139 | (36 674) | ||||
| (Loss)/profit after taxation of discontinued operations | (12 434) | 38 157 | 14 694 | 40 417 | ||||
| Exchange differences on translation of discontinued operations | 17 350 | 10 794 | — | 28 144 | ||||
| Other comprehensive income from discontinued operations | 17 350 | 10 794 | — | 28 144 | ||||
| Total comprehensive income from discontinued operations | 4 916 | 48 951 | 14 694 | 68 561 | ||||
| (Loss)/profit for the period attributable to: | (12 434) | 38 157 | 14 694 | 40 417 | ||||
| Equity holders of the parent | (26 311) | 38 157 | 14 694 | 26 540 | ||||
| Non-controlling interest | 13 877 | — | — | 13 877 | ||||
| Total comprehensive income for the period attributable to: | 4 916 | 48 951 | 14 694 | 68 561 | ||||
| Equity holders of the parent | (12 027) | 48 951 | 14 694 | 51 618 | ||||
| Non-controlling interest | 16 943 | — | — | 16 943 | ||||
Cash flow information of discontinued operations
| VAS operations 1 June 2019 – 30 April 2020 R'000 |
3G Mobile 1 June 2019 – 14 February 2020 R'000 |
WiConnect 1 June 2019 – 31 May 2020 R'000 |
Total 2020 R'000 |
|||||
| Net cash inflow from ordinary activities | 172 623 | 194 913 | 166 365 | 533 901 | ||||
|---|---|---|---|---|---|---|---|---|
| Net cash inflow/(outflow) from investing activities | 183 152 | (129 525) | (61 519) | (7 892) | ||||
| Net cash (outflow)/inflow from financing activities | (279 568) | 2 336 | (105 230) | (382 462) | ||||
| Net increase in cash generated/(utilised) by the discontinued operations | 76 207 | 67 724 | (384) | 143 547 |
| VAS operations 2019 R'000 |
3G Mobile 2019 R'000 |
WiConnect 2019 R'000 |
Total 2019 R'000 |
|||||
| Net cash inflow/(outflow) from ordinary activities | 56 211 | (15 270) | 21 149 | 62 090 | ||||
| Net cash inflow/(outflow) from investing activities | 28 138 | 351 | (17 260) | 11 229 | ||||
| Net cash (outflow)/inflow from financing activities | (53 289) | 2 572 | (38 245) | (88 962) | ||||
| Net increase in cash generated/(utilised) by the discontinued operations | 31 060 | (12 347) | (34 356) | (15 643) |
Details of the sale of subsidiaries
| VAS operations 2020 R'000 |
3G Mobile 2020 R'000 |
Total 2020 R'000 |
||||
| Consideration received or receivable: | ||||||
| Cash | 350 000 | 544 000 | 894 000 | |||
| Loan claims settled from cash | (44 626) | — | (44 626) | |||
| Fair value of contingent consideration* | 71 967 | — | 71 967 | |||
| Total disposal consideration | 377 341 | 544 000 | 921 341 | |||
| Carrying amount of net assets attributable to equity holders of the parent sold | 468 871 | 505 477 | 974 348 | |||
| (Loss)/gain on sale before income tax and reclassification of foreign currency translation reserve | (91 530) | 38 523 | (53 007) | |||
| Income tax expense on (loss)/gain | — | — | — | |||
| Reclassification of foreign currency translation reserve | 48 508 | 5 027 | 53 535 | |||
| (Loss)/gain on sale after income tax | (43 022) | 43 550 | 528 |
* The determination of the fair value of the contingent consideration of R72 million involved significant management judgement. For further information in this regard refer to the information under “Critical accounting judgements and assumptions” .
The carrying amounts of assets and liabilities as at the date of sale (30 April 2020 for VAS operations and 14 February 2020 for 3G Mobile) were:
Critical accounting judgements and assumptions
Fair value of the contingent consideration receivable
As explained under "Financial performance and cash flow information", management performed an exercise in terms of IFRS 5 under which the fair value less cost to sell was estimated for the VAS operations. The fair value of the VAS operations was determined using the fair value of the selling price. Since the ultimate consideration realised for the VAS operations will depend partly on whether Cell C's solvency and liquidity is proven, and if not, it will depend partly on the value of 24% of the shares in Airvantage and AV Technology, the determination of the fair value of the contingent consideration included in the selling price involved significant management judgement and, accordingly, is a level 3 input per the fair value hierarchy. The fair value was determined using a probability weighted basis which reflects the extent to which management believes that Cell C's solvency and liquidity will be proven, as well as management's estimate of the fair value of 24% of Airvantage and AV Technology:
| Solvency and liquidity of Cell C is proven |
Solvency and liquidity of Cell C remains unproven |
||||
| Cash consideration | R450 million | R350 million | |||
| Fair value of 24% of the issued share capital of Airvantage and AV Technologies | R0* | R43 million | |||
| Total fair value | R450 million | R393 million | |||
| Attributed probability percentage | 51%** | 49% | |||
| Weighted average fair value of total consideration receivable | R422 million | ||||
| Fair value of the contingent consideration receivable | R72 million | ||||
| * | Not applicable as the R100 million contingent purchase consideration will be received should the solvency and liquidity of Cell C be proven. |
| ** | Refer to “Update on Cell C” for the factors that management considered in determining the 51% probability. |
The contingent consideration of the sales price is based on the fair value of the 24% of Airvantage and AV Technology. The fair value of 24% of Airvantage and AV Technology was determined taking into account the adverse impact on Airvantage’s operations, should the solvency and liquidity of Cell C remain unproven, since the Airvantage business is largely dependent on Cell C. It has been assumed that Airvantage would not continue to trade and hence no value has been attributed to its 24% share capital. The fair value of 24% of AV Technologies’ share capital is estimated to be R43 million which was determined with reference to its contribution to the total profit of the VAS operations applied to the total selling price as per the VAS operations sales agreement, i.e. should the purchase price have been split between the relevant entities 24% of AV Technologies’ share capital would have been attributed R43 million. This remained constant from initial recognition to subsequent measurement at year-end as the purchase consideration has remained unchanged and the operations and results of the underlying entities upon which the valuation is based have remained largely unchanged.
Should management have attributed a 100% probability to the solvency and liquidity of Cell C being proven, the contingent consideration’s fair value would be R100 million. Conversely, should management have attributed a 0% probability to the solvency and liquidity of Cell C being proven, the contingent consideration’s fair value would be R43 million.
WiConnect discontinued operation considerations
Paragraph 13 of IFRS 5 states that, if a disposal group meets the discontinued operation criteria, the cash flows and results of the disposal group should be presented as discontinued operations at the date on which it ceases to be used. In considering whether the operations of WiConnect have “ceased to be used”, management considered that as at year-end, and for some time prior, WiConnect’s retail stores had ceased trading (even during the periods of the national lockdown where trading was permissible). Furthermore, all inventory had been transferred to a central warehouse, cash collected and swept from stores and affected staff informed of their retrenchment. Additionally, all landlords to the WiConnect retail stores were also informed prior to year-end of the intention to cease all operations. Therefore, while there are still run-off costs to be incurred and assets to be sold and scrapped, these are elements of the closing down of the WiConnect operations. Based on this, together with the fact that inventory has been written down to its net realisable value and sold to one buyer, it is management’s contention that the operations are not ongoing and that the inflows and outflows which are still to occur do not comprise an activity. Based on these facts and circumstances, management applied its judgement and has concluded that the operations of WiConnect have “ceased to be used”.
Management applied further significant judgement in determining whether the operations of WiConnect met the discontinued operations criteria as at year-end. More specifically, management needed to consider whether WiConnect may be classified as a separate major line of business. Under IFRS 8, reportable segments could comprise more than one business segment. Therefore, the fact that WiConnect does not form its own reportable segment (it is included in the Africa Distribution segment) does not preclude it from being considered a major line of business. Executive management and chief operating decision-makers consider WiConnect to be a separate major line of business as a result of several considerations, namely that it was brick-and-mortar retail (or physical stores owned and operated by the Group) directly interacting with clients in the retail space through our own channels/stores selling hardware and other value-added services directly to consumers. This, coupled with the loss after tax of R318 million (which is considered to be material in the context of the overall Group results for the year ended 31 May 2020), led to management applying its judgement in concluding that WiConnect is a separate major line of business and consequently meets the definition of a discontinued operation.
Derivative liability fair value
As explained under the heading “Financial performance and cash flow information”, significant management judgement was applied in determining the extent that the exercise price does not represent the fair value of the underlying shares. The amount at which the put and call options may be exercised is contractually determined based on the 31 May 2020 audited results at a 6 x net profit after tax multiple. This formula has been used in determining the total value of the put option liability. As the VAS Operations disposal group (which included Airvantage and AV Technology) was sold at a similar net profit after tax multiple, the multiple is deemed to be representative of a fair market multiple to be used in calculating the value of the shares. However, management has taken into account the adverse impact on Airvantage’s operations should the solvency and liquidity of Cell C remain unproven, since the Airvantage business is largely dependent on Cell C. Therefore the derivative has been measured at the difference between the fair value of Airvantage and the exercise price of the put option. Accordingly, these inputs are level 3 inputs per the fair value hierarchy.
The same facts and circumstances were taken into account in this critical accounting judgement as were taken into account in the update on Cell C note, with management concluding the following:
| Total value of Airvantage put option liability on 30 April 2020 (A) | 158 213 | |
| Attributed probability percentage of the solvency and liquidity of Cell C remaining unproven (B) | 49% | |
| Extent that the exercise price does not represent the fair value of the underlying shares (A x B) | 77 524 |
Should management have attributed a 100% probability to the solvency and liquidity of Cell C being proven, the entire put option would have been considered to be at value and, as such, no liability would have been recognised. Conversely, should management have attributed a 0% probability to the solvency and liquidity of Cell C being proven, the entirety of the portion of the put option related to Airvantage would have been considered to not be at value and, as such, a liability of R158 million would have been recognised. The put option over the shares of AV Technology is considered to be at fair value as the operations and results of the entity upon which the valuation is based have remained largely unchanged and six times net profit multiple is consistent with the earnings multiple at which the shares in the entity have been disposed of.