Blue Label Telecoms

Investments in and loans to venture capital associates and joint venture

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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 now 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. In the prior year, any additional changes in the fair value between 30 November 2016 and year-end were recognised in the Group statement of comprehensive income. Likewise, in the current period, any changes in the fair value between 31 May 2017 and 30 November 2017 have been recognised in the Group statement of comprehensive income. The fair value adjustment recognised in the Group statement of comprehensive income for the period ended was R0.7 million (2016: R264 million).

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 implemented 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 reviews 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 they generate. In addition, management has established an exit strategy with a view to realising 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 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 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 5.1 was applied in determining the fair value.

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