Microsoft Word - IMP0908.docEden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis Overview of Eden Springs Ltd
Eden Springs Ltd. (“the Company”) and its investee companies (collectively, “the Group”) are principally engaged in the direct distribution of water in large bottles to places of business and private homes. In Europe, the Group operates in sixteen countries, mainly in the home and office delivery sector. In most of the European countries in which the Group is active, the Group operates, with respect to the majority of the activity, under the brand name of ‘Eden.’ The Group’s operations in Europe are described below as the ‘European operations.’ 1. Summary and results
During the third quarter of 2008, the Company identified certain triggering events, which, when aggregated, led the company to believe that an impairment to the goodwill and other intangible assets of the European business may be impaired. Such triggering events included:
1. Reduction in the profitability of one of the important market - UK ; 2. The impact of the above on the Group EBITDA, comparing it to the budgets and the
business plan; and 3. General economic conditions
As part of the preparation of the interim financial statements of the Company for the third quarter ended September 30, 2008, management has calculated the “recoverable amount” of the European business as defined by International Financial Reporting Standards ("IFRS"), namely – International Accounting Standard (“IAS") No. 36 ("IAS 36"), and compared it with the carrying value of the corresponding goodwill of the European business as of such date. Before testing such goodwill balance for impairment, the Company identified certain individual assets, namely customer portfolio intangible assets, which may individually be impaired. These intangibles were acquired as part of the acquisition of control in the European activities, from Danone Group, in December 2007. Therefore, for each market, the Company calculated the recoverable amount of the respective Costumer portfolio intangible asset and compared it with the carrying amount as of the measurement date. Following this analysis, an impairment of € 30.3 million, in the aggregate, was identified and recorded. The Company then continued to test the goodwill balance for impairment, by comparing its book value with its recoverable amount, and concluded that an additional impairment, all of which is allocated to such goodwill balance, is required, in the amount of € 32.1 million. 2. Limitations
Part of the financial data used is forecasted, thus uncertain in nature. There might be differences between estimated and actual results because events and circumstances frequently do not occur as expected, and those differences may be material. Unlike the fair value, the price of a company is determined by a specific offer and a specific demand at given point of time: the existence or lack of investors, alternative development strategies, etc. can obviously have a major impact on the effective price of the transaction. In particular, the potential synergies that may be generated as a result of the transaction may lead an investor to pay what is commonly referred to as a "change of control premium" in addition to the company's fair value. Conversely, the absence of rarity of investors interested in acquiring a given company may lead to a transaction price that is below the fair value of the company concerned.
Eden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis 3. Methodology applied The objective IAS 36 is to prescribe the procedures that an entity applies to ensure that the carrying amount of its assets do not exceed their recoverable amount, either through use or sale of the asset. If this is the case, the asset is written down to its recoverable amount and an impairment loss is recognized in the income statement. Under IAS 36, the recoverable amount is the higher of:
(1) The net selling price - the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal; and
(2) Value in use - the present value of the future cash flows expected to be derived from an asset as a result of continual usage of the asset and disposal thereof at the end of its useful life.
The recoverable amount is determined individually for each asset. If it is not possible to estimate the recoverable amount of an individual asset, IAS 36 requires the entity to determine the recoverable amount of the cash-generating unit to which the asset belongs ("CGU"), which is the smallest identifiable group of assets that generates cash inflows from continual use that are largely independent of the cash inflows from other assets or groups of assets. The principles applied in recognition and measurement of impairment losses arising from a CGU are similar to the principles that apply in cases of individual assets. IAS 36 specifies how an entity is to determine the carrying amount of a CGU and how to allocate an impairment loss to the unit's assets. Under IAS 36, the recoverable amount is the higher of its net selling price of the asset and its value in use. Nevertheless, in cases where one of the above mentioned amounts exceeds the carrying amount of the asset, no impairment has occurred and there is no need to measure the other amount. Also, it is sometimes impossible to determine the net selling price since there is no basis on which it is possible to establish a reliable estimate of the consideration received from selling the asset in an arm’s length transaction between knowledgeable, willing parties. In such a case the recoverable amount of the asset would be its value in use.
The best evidence for an asset's net selling price is the price in a binding sales agreement in an arm's length transaction between knowledgeable, willing parties, adjusted for incremental costs directly attributable to the asset's disposal. In the absence of a binding sales agreement, the net selling price is the asset's market price in an active market, less costs of disposal. If there is no active market for the asset or a binding selling agreement, the net selling price is to be based on the best information available that reflect the amount that a company could obtain at the balance sheet date, in an arm’s length transaction between knowledgeable, willing parties, net of disposal costs.
Value in use is the present value of the future cash flows expected to be derived from an asset as a result of continual usage of the asset and disposal thereof at the end of its useful life.
Considering the recent acquisition of the European business and the related fair value measurements calculated as part of the allocation of the purchase price, and as permitted by IAS 36.19, management has determined that the recoverable amount is best reflected by its fair value less costs to sell, with the fair value determined by the discounted cash flow method ("DCF"). Furthermore, management estimates that costs to sell any of the European's business or any of the individual assets, are negligible (as such costs would normally be absorbed by the acquirer), and as such, for practical reasons, has estimated selling costs at zero.
Eden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis 4. Industry analysis and overview General - The European Bottled Water and Bottled Cooler Market
The following discusses the overall bottled water market (hereinafter: "BWM") and specifically the bottled cooler market.
The two main market segments discussed are the following:
• Home & Office delivery ("HOD")
HOD services comprise the installation of a cooler (fixed water dispensing unit, from 11 litres to 18.9 litres), which is rented under a service agreement or purchased by the customer.
HOD operations mainly consist of water production, disinfection and purification of the bottles, and distribution to the end costumer. The HOD market is characterised by higher profit margins than other bottled water markets. The relationship is usually based on continuous service contracts; therefore the HOD customer base is viewed as a valued asset.
• Point of use services ("POU")
The POU water coolers are stand-alone units that strongly resemble a bottled water cooler. The main difference is that the unit is plumbed into a portable water supply that processes the water at the last possible point before consumption, rather than sourcing from a pre-packaged bottle. POU provides an unlimited supply of water.
In Europe, consumers have the option to rent the machine, lease to buy, or buy outright. Unit rental usually includes the cost of maintenance, although the consumer usually has to buy a separate maintenance contract if leasing or buying the machine.
Market Analysis by Country
The United Kingdom (UK)
• In 2007, the UK cooler industry represented a total of 718,000 units, a 3.5% rise on 2006. 24,500 new units were installed over the course of the year. The second consecutive annual decline in the bottled cooler installed base of 3.0% was offset by the healthy 21.0% growth rate of POU unit placement.
• POU has increased its share of the total cooler market in 2007 to 31.8% from 27.2% in 2006. That said, it is not believed that POU will attain a 50% over the next five years.
• Zenith Market Research institute (“Zenith”) predicts that by 2012 the total market will reach 871,000 units representing a CAGR of 3.9% over the 2007-2012 period. It is expected that the bottled cooler installed base will be stable at around 515,000 through which 425 million litres of water should be sold. POU coolers are believed to hit 356,000 units in use nationwide by 2012. In 2012, bulk water is believed to account for a declining 16.3% share of total packaged water. POU is anticipated to represent 40.9% of the total UK cooler installed base.
France
• In 2007: - bottled water coolers declined by 3.0% to hit 253,670 units on the market - French bottled water coolers claimed a diminished 13.4% share of West Europe’s
bottled water cooler total - 4.11 bottled water cooler units per thousand people were in place. By way of comparison: - POU in France experienced a 27.2% boost to reach 120,800 units
Eden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis
- 25,800 new POU units were installed in the twelve months to December 2007 - the total French POU portfolio claimed a 15.4% share of West Europe’s POU total - 1.96 POU units per thousand people were in place. • The bottled water cooler market nearing its saturation point, and bottled to POU
cooler conversion remaining at around the 30% level, have allowed French POU to gain share. In 2007, POU's share of total coolers placed (bottled water coolers and POU combined) stood at 32.3%.
• By 2012, Zenith expects there to be 273,350 water coolers installed through which
around 242.9 million litres of water could be dispensed. These totals could be higher still if the in-home/domestic sector is developed to its full potential. In addition, the importance of POU is undeniable, with around 213,000 POU units in place by 2012. This will mean that POU will increase its share of the total water cooler market from 32.3% in 2007 to 43.8% in 2012.
Spain
• In 2007: - point of use (POU) grew by 29.3% to reach 21,850 units - 4,950 new POU units were installed - the total Spanish POU portfolio claimed a 2.8% share of West Europe’s POU total - 0.49 POU units per thousand people were in place. By way of comparison: - bottled water coolers grew by 13.0% to reach 222,840 units - Spanish bottled water coolers claimed a rising 11.8% share of West Europe’s bottled
water cooler total - 5.03 bottled water cooler units per thousand people were in place. • In contrast to other cooler markets, in Spain both bottled water coolers and POU have
witnessed strong annual growth. POU has witnessed a gradual increase in share of the total number of cooler units placed (bottled water coolers and POU combined). It had a 5.4% share of total coolers in 2002 and a 8.9% share in 2007.
• Zenith forecasts that there could be up to 329,540 unit placements by the end of
2012, with volume sales of 279.9 million litres. In addition, up to 45,750 POU units are forecast to be in place, which would see POU increase its share of the total water cooler market to 12.2% by 2012.
Germany
In 2007: - point of use (POU) grew by 26.8% in Germany to reach 48,200 units - 10,200 new POU units were installed - the total German POU portfolio claimed a 6.1% share of West Europe’s POU total - 0.58 POU units per thousand people were in place
By way of comparison: - bottled water coolers declined by 2.0% to 126,910 units placed - German bottled water coolers claimed a 6.7% share of West Europe’s bottled water
cooler total - 1.54 bottled water cooler units per thousand people were in place
• Zenith estimates the German bottled water cooler market will attain 175,900 units
with total volume sales of 113.7 million litres by 2012. In addition, with dramatic growth expected to continue for the POU industry, total POU units are forecast to reach 138,400 units in 2012, up from 48,200 units in 2007. Zenith forecasts around 121,500 units will be in place by 2012, up from 38,000 units in 2006. Based on a revised forecast for bottled water coolers, POU is expected to gain share in the total
Eden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis
number of cooler units placed (bottled water coolers and POU combined). From a 25.6% share of total coolers in 2007, POU is forecast to reach 44.0% by 2012.
Netherlands
In 2007: - the POU market in the Netherlands grew by 16.8% to reach 28,500 units - 4,100 new POU units were placed - the total Dutch POU portfolio claimed a diminished 3.6% share of West Europe’s
POU total - 1.74 POU units per thousand people were in place.
By way of comparison: - bottled water coolers increased by 1% to reach 98,830 units placed - Dutch bottled water coolers claimed a 5.2% share of West Europe’s bottled water
cooler total - 6.02 bottled water cooler units per thousand people were in place.
• Zenith forecasts that the market will reach a total of 108,290 units, with volume sales
of 77.3 million litres by 2012. POU's role in the Dutch cooler arena is expected to be further augmented, particularly as bottled cooler companies embrace the concept and become 'hydration solutions' companies. Thus, the POU market is forecast to reach 48,600 units by 2012, with POU increasing its share of the total water cooler market from 22.4% in 2007 to 31.0% in 2012.
Switzerland
In 2007: - from a relatively small base, POU in Switzerland grew by 2,300 new POU units that
were placed - the Swiss POU portfolio claimed a 1.2% share of West Europe’s POU - 1.23 POU units per thousand people were in place
By way of comparison: - bottled water coolers grew by 5% to reach 40,215 units - Swiss bottled water coolers claimed a 2.1% share of West Europe’s bottled - 5.37 bottled water cooler units per thousand people were in place
• The bottled water coolers industry is still achieving a steady growth of 5%, while POU
placements have surged by 33.3%. In 2007, POU's share of total coolers placed (bottled water coolers and POU combined) stood at 18.6%.The Swiss market can be expected to experience further growth.
• Zenith forecasts that by the end of 2012 around 55,125 bottled water coolers could be
in place, through which 55.1 million litres should be sold. In addition, total POU units are forecast to reach 27,970 units in 2012, up from 9,200 units in 2007. Based on a forecast for bottled water coolers, POU is expected to demonstrate a strong increase in share of the total number of cooler units placed (bottled water coolers and POU combined). From an 18.6% share of total coolers in 2007, POU is forecast to reach a 33.7% share by 2012.
Nordics
• The Nordics maintain a historic positive growth rate of 4%-7%, excluding a sharp decline during 2004, driven by extreme weather conditions. In addition, the Nordics are some of the least developed water markets in Europe, with low per capita consumptions and conversely the highest priced bottle water markets were in the Nordics. In the HOD segment the Group maintained market dominance with a 53.4% of the segments cooler base.
Eden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis
• The POU segment maintained a 35% share of water coolers which is the second highest penetration of POU in Europe. The major competitor in the POU segment was Waterlogic. The forecasted annual growth rate in number of units for the POU segment is 6-7% and for the HOD segment 2-3%.
• According to Zenith estimations by 2012 the market is forecast to reach 98,240 units of water coolers and 103,950 of POU.
Poland
• The Polish market started to take shape in 1993 and ranked second in Eastern
Europe with 418,540 units in place at the end of 2007. Water cooler machines represent the bulk of the market and have a 75.5% share, with pumps and dispensers accounting for the remaining 24.5%. Water for water coolers reached 416.6 million litres in 2007.
• Poland led in the Central European region with 81.9%, and ranked second in East
Europe with 27.2% of placements in 2007. • Though the Polish water cooler market is displaying signs of maturity, with decreasing
profitability, falling prices, a more crowded and competitive market and declining growth etc, the market still has potential. The market is forecast to reach 508,100 units and 520 million litres by 2012.
Italy
In 2007: - the POU market in Italy grew by an estimated 27.3% to reach 210,000 units 45,000
new POU units were placed - the total Italian POU portfolio claimed a 26.7% share of Western Europe’s POU total - 3.57 POU units per thousand people were in place.
By way of comparison: - bottled water coolers grew by 4% to reach 222,460 units placed - Italian bottled water coolers claimed an elevated 11.8% share of West Europe’s
bottled water cooler total - 3.78 bottled water cooler units per thousand people were in place.
• Zenith forecasts that the annual growth of past years will be sustained, albeit at a
slightly reduced rate. Some increase in the acceptance of the cooler concept seems likely, especially as the industry starts to build critical mass. Zenith predicts that by 2012, 258,860 units could be in place, with total volume sales approaching 186.0 million litres. Some 354,000 POU units are also expected to have been installed by 2012, which would give POU a 57.8% share of the total water cooler market.
The Baltics (Estonia, Latvia and Lithuania)
• There is virtually no POU in the market. The POU segment is not expected to be a serious challenger to the HOD segment due to relatively low revenue per cooler. As presented, the main market leader is Gelsva with 38.3% of total cooler market. In the HOD segment both Eden and Gelsva each hold about a fourth of the segment.
• By 2012 the market is forecast to reach 220,890 units, of which majority will be cooler units.
Eden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis 5. Business analysis and overview History and nature
Through its network of branches, the Group provides services to almost half a million customers.
HOD services
The Group's HOD operations in Europe include the following:
• Refill of bottles in factories across Europe. The water is produced from various water springs and also purchases refill services from third parties.
• Delivery of filled bottles to the branches and distribution to final customers.
As the European HOD market is characterised by long-term relationships with clients, management considers its client base to be an essential asset and the recruitment of a new client requires a high primary investment (cooler and bottle purchase), which is returned over time.
POU services
The POU water coolers are stand-alone units that strongly resemble a bottled water cooler. The main difference is that the unit is plumbed into a portable water supply that processes the water at the last possible point before consumption, rather than sourcing from a pre-packaged bottle. POU provides an unlimited supply of water.
In Europe, the Group offers consumers the option to rent the machine, lease to buy, or buy outright. Unit rental usually includes the cost of maintenance, although the consumer usually has to buy a separate maintenance contract if leasing or buying the machine.
6. The methodology implemented
• As mentioned above, to determine whether an impairment is necessary or not, an asset's (CGU's) carrying amount is compared with its recoverable amount.
• An asset (or a CGU) will be impaired if its carrying amount exceeds its recoverable amount (as defined above).
• As defined in section 19 of IAS 36, it is not always necessary to determine both an asset's Fair Value Less Costs to Sell and its Value in Use to estimate the recoverable amount.
• In the present case, the Company has determined a fair value less costs to sell (assuming that the costs to sell are negligible).
• Furthermore the Company no indication to believe European Business's Value in Use would be higher than its Fair Value Less Costs to Sell.
• In the absence of a binding sale agreement or an active market, the Company has determined the European business's Fair Value on the basis of a DCF approach.
As mentioned above, before testing the goodwill balance for impairment, the Company identified certain individual assets, namely customer portfolio intangible assets, which may individually be impaired. Therefore, for each market, the Company calculated the recoverable amount of the respective intangible asset (customer relations) and compared it with the carrying amount as of the measurement date.
Eden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis 7. Valuation approach– discounted cash flows
a. Management’s business plan presentation
European business Normative in Keuro 2009 2010 2011 2012 2013 2014 2015 190,410 187,673 187,673 192,392 198,196 203,151 207,214 210,323 % Growth -1.4% 0.0% 2.5% 3.0% 2.5% 2.0% 1.5% EBITA 18,831 20,934 26,053 29,906 30,654 31,267 31,736 % of revenues 10.0% 11.2% 13.5% 15.1% 15.1% 15.1% 15.1%
Corporate Tax -1,967 -2,521 -2,420 -3,397 -4292 -4690 -5712
Corporate Tax Rate -10.4% -12.0% -9.3% -11.4% -14.0% -15.0% -18.0%
NOPAT 16,864 18,412 23,634 26,509 26,362 26,577 26,024 % Of revenues 9.0% 9.8% 12.3% 13.4% 13.0% 12.8% 12.4%
+ Depreciation 15,262 14,722 14,155 13,682 13,182 12,682 12,182 - CAPEX -10,278 -10,447 -10,701 -11,089 -11,366 -11,593 -11,767 - Acquisition Costs 0 0 0 0 0 0 0 - Change in Working Capital -274 0 472 580 495 406 311
=Free Cash Flows 21,574 22,687 27,559 29,682 28,673 28,071 26,749
The business plan assumptions can be summarized as follows:
Sales and sales growth rate - the sales figures are built on a bottom up process by each market business plan for the next 4 years (till the end of 2012), there are 2 main drivers for the sales development which are the Client base development and the revenue per client. In the first years of the business plan (2009 and 2010) the client base remain stable and growing since the economy slowdown and the negative sentiment against bottled water in some countries while pricing pressure from economy slow down and new types of contracts cause to continuation of revenues decrease that will stabilized in the year 2010. In the years 2011-2012, management estimates that the recovery from the global economy slowdown and the deflation pressure will let to increase prices which will assist to keep the same average revenue per client and let the Company to perform positive trend of growth to level of 2.5-3% per year (in client base and total revenues). Churn rate - The Company presented over the last 3 years very good trend of churn rate reduction, from a level of more than 20% to almost 16% in 2008. Management estimates that long term wise this trend may continue and reach the level of 15%. But due to the current economic situation, the performance will face some difficulties in the short term. Capital expenditure & depreciation - the CAPEX level of the Company is derived of 2 main drivers - CAPEX for the existing activity (maintenance) and CAPEX for growth. The average level of CAPEX required for the current level of activity amounts to approximately in €9 million. It includes renewal of Bottles, Machinery for the owned plants, leasehold improvements, water coolers, etc. The CAPEX for growth is derived by the clients’ base growth and the penetration to the POU activity. The average CAPEX for an additional client is estimated at €150. EBITDA margin - The European business recorded its record profitability in the year 2007. Its EBITDA margin reached a level of 20% (before SH management fee charge) in the year 2008 est., the European business experienced high reduction in revenues (about 6%) and reduction of EBITDA level to a level of 17.5% (mainly due to the results of the UK activity). Management assumes that following the stabilization of the UK market (in the years 2009-10). The Group will be able to get back to similar rate of profitability and reach a level of 22% in the long term, once the revenues trend will get back to grow in average 2-3% a year The forecasted Period - The forecast period includes 6 years forecast and representative year. The first 4 years are based on the detailed business plan per market and the remained 2 years are additional years to bridge between the growth rates in the year 2012 (3%) and the
Eden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis long term growth rate of 1.5%. Given the growth recorded in 2012, we have estimated that it is not relevant to compute terminal value with a steady long term growth rate at that date. We have therefore extended the projection period for 2 additional years assuming that the sales growth rate would decrease linearly each year. Working capital growth rate - the average working capital level of the company as a percentage of revenues is approximately 10%. The reason for the negative working capital level is the fact that the Group charges clients for deposit on bottles and coolers and invoice some of contracts for future period (deferred revenues). Terminal Value - Long term growth rate was estimated at average level of GDP growth expected in the long run. Tax rate - has been computed on the basis of a progressive use of the tax losses carried forward over the projection period and the tax plan of the company. In the long term the average tax rate is estimated to reach a level of 18%.
b. Discount Rate Computation - WACC
Risk and uncertainty
The application of discounted cash-flow methods requires the determination of an appropriate discount rate. Discounted cash-flow methods are applied under conditions of uncertainty. In common usage, the word risk refers to any exposure to uncertainty in which the exposure has potential negative consequences. It is assumed that marketplace participants are said to be risk adverse. A risk-averse market participant prefers situations with a narrower range of uncertainty over situations with a greater range of uncertainty relative to an expected outcome. Marketplace participants seek compensation, referred to as a risk premium, for accepting uncertainty.
Therefore the determination of the discount rate implies the comparison of the cash-flows generated by the asset with the cash-flows generated with the most favourable alternative investment. In this respect, it must be carefully observed that the cash-flows from the asset being valued and the alternative investment are equivalent in terms of risk and maturity.
The determination of the asset-specific, risk-adjusted discount rate is based on the weighted average cost of capital (WACC). The following formula is applied to calculate WACC:
WACC = WE * KE + WD * KD
with
KE = market value of equity
WD = value of interest bearing debt / value of total capital
KD = after tax costs of interest bearing debt
Since the WACC reflects the specific risk of an enterprise, adjustments have to be considered based on the asset-specific risk profile.
Eden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis Market value of equity
To estimate the opportunity cost of equity the capital asset pricing model (CAPM) is used. The CAPM postulates that the opportunity cost of equity is equal to the return on risk-free securities plus an individual risk premium. The risk premium is the company’s systematic risk (beta) multiplied by the market price of risk (market risk premium).
The equation for the cost of equity is as follows:
KE = RF + ß * MRP
ß = systematic risk of the equity
MRP = market risk premium
Starting point for the estimate of cost of equity is the risk-free rate of return. In practice the interest rate of long-term risk-free financial investments, e.g. fixed-interest public sector securities, is used as a guideline for determining the prevailing interest rate.
The market risk premium (the price of risk) is the difference between the expected rate of return on the market portfolio and the risk-free rate.
The average market risk premium must be modified to reflect the specific risk structure. The Capital Asset Pricing Model accounts for the company-specific risk within the beta factor. Beta factors represent a weighting figure for the sensitivity of the company’s returns compared to the trend of the entire market. They are thus a measure of volatility for the systematic risk. Beta factors of more than one reflect a higher volatility; beta factors of less than one reflect a lower volatility than the market average. Beta factors are ideally determined with reference to the entire equity market, since the concept of systematic and specific risk requires that individual shares are measured in relation to the market portfolio.
When activities in different countries are taken into consideration it might be appropriate to use country specific risk premiums.
Cost of debt
The estimate of the cost of debt refers to the capital market that best reflects the currency in which the cash-flows have been planned utilizing the most current market rate of debt with equivalent risk. Hence, the coupon rate, i.e. the historical cost of debt, is irrelevant for determining the current cost of capital.
Capital structure
The capital structure is derived from the average capital structure of a group of comparable companies (peer group).
Eden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis To determine an appropriate WACC level the company used the "theoretical approach". This approach leads to a WACC level of 11.5%, as presented below: Parameters Source
Debt Borrowing rate 7.25% Based on the Company's credit agreement terms (Libor +2%) Debt to Equity market value 50% Net Debt of ~90M vs. Net Equity value of ~170M Specific Company risk premium 4.00% Based on Company's size, industry risk and market information.
Expected income tax rate 28% Average corporate tax level After tax Cost of Debt 5.22% Calculated
Risk free rate (Euribor 10Y) 3.80% Current market indication Market rate of return 5.00% Spread and Risk Premium Relevered Beta 1.33 Based on management knowledge and Reuters' data Cost of Equity Capital 14.45% Calculated
Weighted Average Cost of Capital
Debt 1.74% Calculated Equity 9.63% Calculated WACC 11.37% Calculated Rounded WACC 11.50%
The below rates were used to discount cash flows generated by the respective markets for the purpose of the impairment test of customer portfolio intangible assets:
European business by market
Debt Borrowing rate 7.25% Debt to Equity market value 50% Specific Company risk premium 4.00%
UK NO GE&NL PL FR SP CH BL IT Expected income tax rate 28.0% 27.5% 25.5% 19.0% 34.0% 32.0% 24.0% 18.0% 34.0% After tax Cost of Debt 5.22% 5.26% 5.40% 5.87% 4.79% 4.93% 5.51% 5.95% 4.79%
Risk free rate (Libor/Euribor 10Y) 4.2% 3.8% 3.8% 6.9% 3.8% 3.8% 2.6% 6.0% 3.8% Market rate of return 5.5% 5.0% 5.0% 6.0% 5.0% 5.0% 5.0% 6.0% 5.0% Relevered Beta 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33 Cost of Equity Capital 15.52% 14.45% 14.45% 18.83% 14.45% 14.45% 13.25% 17.98% 14.45%
Weighted Average Cost of Capital
Debt 1.7% 1.8% 1.8% 2.0% 1.6% 1.6% 1.8% 2.0% 1.6% Equity 10.3% 9.6% 9.6% 12.6% 9.6% 9.6% 8.8% 12.0% 9.6% WACC 12.1% 11.4% 11.4% 14.5% 11.2% 11.3% 10.7% 14.0% 11.2% WACC (rounded) 12.0% 11.0% 11.0% 15.0% 11.0% 11.0% 11.0% 14.0% 11.0%
c. Terminal Value The terminal value corresponds to the sum of cash-flows generated after the explicit forecast period. It is generally estimated by considering that the entity cash-flows will grow at a constant rate after the explicit projection period.
This terminal value is then discounted as of the valuation date.
Eden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis
d. Tax amortization benefit
In the context of valuing the customer portfolio intangible assets, the tax amortization benefit (“TAB”) is an uplift to reflect the value of the tax-shield afforded by the amortization of capitalized intangible assets. The tax amortization benefit is a valuation concept, not a tax or accounting concept.
This analysis assumes that a hypothetical buyer could capitalize the intangible asset and reduce future taxable income through amortization over a certain period pursuant to the applicable tax regulations. This tax shield is discounted to present value and added to the pre-amortization value to determine the fair value.
e. Results
Based on this analysis, an impairment of € 30.3 million, in the aggregate, was identified with respect to the Group's customer relationships intangible assets. The company then continued to test the goodwill balance for impairment, by comparing its book value with its recoverable amount, and concluded that an additional impairment, all of which is allocated to such goodwill balance, is required, in the amount of € 32.1 million.
Impairment test of European business - Summary (as of 30.09.2008)
('000 Euro)
Net Debt 92,800
Fair Equity value 168,157
Tangible and liabilities of CGU, net -50,511 Recoverable ammount of goodwiil and other intangible assets 218,668
Book value of Intangible assets of the European CGU 281,067
Total Impairment requiered -62,399 Allocated as follows: Customers relationships - UK - Appendix B1 -20,056 Customers relationships - Nordics - Appendix B2 -8,372 Customers relationships - GE&NL - Appendix B3 0 Customers relationships - Poland - Appendix B4 -480 Customers relationships - France- Appendix B5 0 Customers relationships - Spain - Appendix B6 -289 Customers relationships - Switzerland - Appendix B7 0 Customers relationships - Baltics - Appendix B8 -868 Customers relationships - Italy - Appendix B9 -203
-30,268 Goodwill impairment - resudual -32,131
Eden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis Appendix A European business - fair value less cost to sell Normative in Keuro 2009 2010 2011 2012 2013 2014 2015 190,410 187,673 187,673 192,392 198,196 203,151 207,214 210,323 % Growth -1.4% 0.0% 2.5% 3.0% 2.5% 2.0% 1.5% EBITA 18,831 20,934 26,053 29,906 30,654 31,267 31,736 % of revenues 10.0% 11.2% 13.5% 15.1% 15.1% 15.1% 15.1%
Corporate Tax -1,967 -2,521 -2,420 -3,397 4,292- 4,690- 5,712-
Corporate Tax Rate -10.4% -12.0% -9.3% -11.4% -14.0% -15.0% -18.0%
NOPAT 16,864 18,412 23,634 26,509 26,362 26,577 26,024 % Of revenues 9.0% 9.8% 12.3% 13.4% 13.0% 12.8% 12.4%
+ Depreciation 15,262 14,722 14,155 13,682 13,182 12,682 12,182 - CAPEX -10,278 -10,447 -10,701 -11,089 -11,366 -11,593 -11,767 - Change in Working Capital -274 0 472 580 495 406 311
=Free Cash Flows 21,574 22,687 27,559 29,682 28,673 28,071 26,749
Valuation Assumptions Discount rate 11.5% Long-term growth rate 1.5% Time Factor 0.5 1.5 2.5 3.5 4.5 5.5 Discount Factor 0.947 0.849 0.762 0.683 0.613 0.550
Discounted Cash Flows 20,431 19,269 20,993 20,279 17,569 15,426
Sum of Discounted Cash-Flows 113,967 Terminal Value 267,485 Discounted terminal value 146,990 Enterprise Value 260,957 in Keuro
Eden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis Appendix B1 Customers relationships - UK
0.125 0.75 1.75 2.75 3.75 4.75 5.75 6.75 7.75 8.75 9.75 Currency: £'000 Notes Q408 Fcst FY08F FY09F FY10F FY11F FY12F FY13F FY14F FY15F FY16F FY17F FY18F N° of Clients (BoP) 100,000 121,970 * 96,844 76,507 62,736 52,071 43,219 35,871 29,773 24,712 20,511 17,024 Churn rate 20.6% 21.0% 18.0% 17.0% 17.0% 17.0% 17.0% 17.0% 17.0% 17.0% 17.0% Monthly Revenue per Client in £ 21 24.0 23.4 23.2 23.5 23.5 23.5 23.5 23.5 23.5 23.5 23.5
Revenue 6,300 35,500 24,292 19,383 16,188 13,436 11,152 9,256 7,682 6,376 5,292 4,393 Net revenue growth rate -31.6% -20.2% -16.5% -17.0% -17.0% -17.0% -17.0% -17.0% -17.0% -17.0% COGS w/o Depr. 1,323 7,207 4,931 3,973 3,270 2,714 2,230 1,851 1,536 1,275 1,058 879 % of revenue 21.0% 20.3% 20.3% 20.5% 20.2% 20.2% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% Gross Profit 4,977 28,294 19,361 15,409 12,918 10,722 8,921 7,405 6,146 5,101 4,234 3,514 Operating cost** w/o Depr. 3,654 20,484 13,749 11,048 8,579 7,121 5,910 4,906 4,072 3,379 2,805 2,328 % of revenue 58.0% 57.7% 56.6% 57.0% 53.0% 53.0% 53.0% 53.0% 53.0% 53.0% 53.0% 53.0% EBITDA 1,323 7,810 5,611 4,361 4,338 3,601 3,011 2,499 2,074 1,722 1,429 1,186 % of revenue 21.0% 22.0% 23.1% 22.5% 26.8% 26.8% 27.0% 27.0% 27.0% 27.0% 27.0% 27.0% Royalty rate and corresponding charge for the use of Brand Name 1.50% -95 -533 -364 -291 -243 -202 -167 -139 -115 -96 -79 -66
1,229 7,278 5,247 4,070 4,095 3,399 2,844 2,360 1,959 1,626 1,350 1,120 Income tax expense 28.00% -344 -2,038 -1,469 -1,140 -1,147 -952 -796 -661 -549 -455 -378 -314 After Tax EBITDA 885 5,240 3,778 2,931 2,949 2,447 2,047 1,699 1,410 1,171 972 806 Contributory Charge at 5.68% 5.68% -358 -2,016 -1,380 -1,101 -919 -763 -633 -526 -436 -362 -301 -250 After Tax Cash Flow 527 3,223 2,398 1,830 2,029 1,684 1,414 1,174 974 809 671 557
Present value factor 12.0% 0.99 0.92 0.82 0.73 0.65 0.58 0.52 0.47 0.42 0.37 0.33 Present value of after tax cash flow 519 0 2,203 1,501 1,486 1,101 825 612 453 336 249 184 Sum, present value of after tax cash flow 9,469 Present value of tax benefit 1,991 Recommended Fair Value (rouded) 11,460 Net value of Customer Portfolio in ES books as of 30.09.08 27,339 Calculated impairment -15,879 £
-20,056 Euro
Eden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis
Appendix B2 Customers relationships - Nordics
0.125 0.75 1.75 2.75 3.75 4.75 5.75 6.75 7.75 8.75 9.75 Currency: Euro'000 Notes Q408 Fcst FY08F FY09F FY10F FY11F FY12F FY13F FY14F FY15F FY16F FY17F FY18F N° of Clients (BoP) 37,500 45,441 * 39,306 34,197 29,922 26,331 23,172 20,391 17,944 15,791 13,896 12,228 Churn rate 13.5% 13.0% 12.5% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% Monthly Revenue per Client in £ 48.0 49.7 49.2 48.8 48.8 48.8 48.8 48.8 48.8 48.8 48.8 48.8
Revenue 5,400 26,056 21,698 18,774 16,471 14,494 12,755 11,225 9,878 8,692 7,649 6,731 Net revenue growth rate -16.7% -13.5% -12.3% -12.0% -12.0% -12.0% -12.0% -12.0% -12.0% -12.0% COGS w/o Depr. 972 4,430 3,775 3,267 2,849 2,464 2,168 1,908 1,679 1,478 1,300 1,144 % of revenue 18.0% 17.0% 17.4% 17.4% 17.3% 17.0% 17.0% 17.0% 17.0% 17.0% 17.0% 17.0% Gross Profit 4,428 21,626 17,923 15,507 13,622 12,030 10,587 9,316 8,198 7,215 6,349 5,587 Operating cost** w/o Depr. 3,186 15,060 13,236 11,715 10,080 8,871 7,781 6,847 5,927 5,215 4,590 4,039 % of revenue 59.0% 57.8% 61.0% 62.4% 61.2% 61.2% 61.0% 61.0% 60.0% 60.0% 60.0% 60.0% EBITDA 1,242 6,566 4,687 3,792 3,541 3,160 2,806 2,469 2,272 1,999 1,759 1,548 % of revenue 23.0% 25.2% 21.6% 20.2% 21.5% 21.8% 22.0% 22.0% 23.0% 23.0% 23.0% 23.0% Royalty rate and corresponding charge for the use of Brand Name 1.50% -81 -391 -325 -282 -247 -217 -191 -168 -148 -130 -115 -101
1,161 6,175 4,361 3,511 3,294 2,942 2,615 2,301 2,124 1,869 1,645 1,447 Income tax expense 27.50% -319 -1,698 -1,199 -965 -906 -809 -719 -633 -584 -514 -452 -398 After Tax EBITDA 842 4,477 3,162 2,545 2,388 2,133 1,896 1,668 1,540 1,355 1,192 1,049 Contributory Charge at 5.68% 5.68% -307 -1,480 -1,232 -1,066 -936 -823 -724 -638 -561 -494 -434 -382 After Tax Cash Flow 535 2,997 1,930 1,479 1,453 1,310 1,171 1,031 979 861 758 667
Present value factor 11.0% 0.99 0.92 0.83 0.75 0.68 0.61 0.55 0.49 0.45 0.40 0.36 Present value of after tax cash flow 528 0 1,784 1,232 1,090 886 713 566 484 384 304 241 Sum, present value of after tax cash flow 8,212 Present value of tax benefit 1,689 Recommended Fair Value (rouded) 9,901 Net value of Customer Portfolio in ES books as of 30.09.08 18,273 Calculated impairment -8,372
Eden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis
Appendix B3 Customers relationships - GE&NL
0.125 0.75 1.75 2.75 3.75 4.75 5.75 6.75 7.75 Currency: £'000 Notes Q408 Fcst FY08F FY09F FY10F FY11F FY12F FY13F FY14F FY15F FY16F N° of Clients (BoP) 33,333 38,442 * 33,829 30,108 27,097 24,387 21,949 19,754 17,778 16,001 Churn rate 12.0% 11.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Monthly Revenue per Client in £ 37.5 38.7 38.7 38.9 38.9 39.1 39.1 38.7 38.7 38.7
Revenue 3,750 17,300 14,846 13,352 12,016 10,870 9,783 8,717 7,845 7,061 Net revenue growth rate -14.2% -10.1% -10.0% -9.5% -10.0% -10.9% -10.0% -10.0% COGS w/o Depr. 675 2,924 2,524 2,270 2,043 1,848 1,663 1,482 1,334 1,200 % of revenue 18.0% 16.9% 17.0% 17.0% 17.0% 17.0% 17.0% 17.0% 17.0% 17.0% Gross Profit 3,075 14,376 12,322 11,082 9,974 9,022 8,120 7,235 6,512 5,860 Operating cost** w/o Depr. 2,006 9,117 7,750 6,876 6,152 5,587 5,029 4,481 4,032 3,629 % of revenue 53.5% 52.7% 52.2% 51.5% 51.2% 51.4% 51.4% 51.4% 51.4% 51.4% EBITDA 1,069 5,259 4,573 4,206 3,821 3,435 3,092 2,755 2,479 2,231 % of revenue 28.5% 30.4% 30.8% 31.5% 31.8% 31.6% 31.6% 31.6% 31.6% 31.6% Royalty rate and corresponding charge for the use of Brand Name 1.50% -56 -260 -223 -200 -180 -163 -147 -131 -118 -106
1,012 5,000 4,350 4,005 3,641 3,272 2,945 2,624 2,361 2,125 Income tax expense 25.50% -258 -1,275 -1,109 -1,021 -928 -834 -751 -669 -602 -542 After Tax EBITDA 754 3,725 3,241 2,984 2,713 2,438 2,194 1,955 1,759 1,583 Contributory Charge at 5.68% 5.68% -213 -983 -843 -758 -683 -617 -556 -495 -446 -401 After Tax Cash Flow 541 2,742 2,397 2,226 2,030 1,820 1,638 1,460 1,314 1,182
Present value factor 11.0% 0.99 0.00 0.92 0.83 0.75 0.68 0.61 0.55 0.49 0.45 Present value of after tax cash flow 534 0 2,217 1,854 1,524 1,231 998 801 649 527 Sum, present value of after tax cash flow 10,335 3,098 2,506 1,928 1,474 1,144 881 682 534 421 Present value of tax benefit 1,942 -3,098 # -289 -74 50 87 117 119 115 106 Recommended Fair Value (rouded) 12,277 Net value of Customer Portfolio in ES books as of 30.09.08 12,269 No impairment -
Eden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis
Appendix B4 Customers relationships - Poland
0.125 0.75 1.75 2.75 3.75 4.75 5.75 6.75 7.75 8.75 Currency: PLN'000 Notes Q408 Fcst FY08F FY09F FY10F FY11F FY12F FY13F FY14F FY15F FY16F FY17F N° of Clients (BoP) 96,400 112,740 94,702 78,602 65,240 54,149 44,944 37,303 30,962 25,698 21,330 Churn rate 16.0% 17.0% 17.0% 17.0% 17.0% 17.0% 17.0% 17.0% 17.0% 17.0% Monthly Revenue per Client in PLN 87.0 88.5 88.5 89.0 89.9 90.5 90.5 90.5 90.5 90.5 90.5
Revenue 25,160 124,500 92,024 76,812 64,398 53,807 44,660 37,068 30,766 25,536 21,195 Net revenue growth rate -26.1% -16.5% -16.2% -16.4% -17.0% -17.0% -17.0% -17.0% -17.0% COGS w/o Depr. 6,542 31,125 23,006 18,512 15,327 12,645 10,495 8,711 7,230 6,001 4,981 % of revenue 26.0% 25.0% 25.0% 24.1% 23.8% 23.5% 23.5% 23.5% 23.5% 23.5% 23.5% Gross Profit 18,619 93,375 69,018 58,300 49,072 41,163 34,165 28,357 23,536 19,535 16,214 Operating cost** w/o Depr. 8,806 42,953 31,472 26,270 21,895 18,025 14,961 12,418 10,307 8,555 7,100 % of revenue 35.0% 34.5% 34.2% 34.2% 34.0% 33.5% 33.5% 33.5% 33.5% 33.5% 33.5% EBITDA 9,813 50,423 37,546 32,031 27,176 23,137 19,204 15,939 13,230 10,981 9,114 % of revenue 39.0% 40.5% 40.8% 41.7% 42.2% 43.0% 43.0% 43.0% 43.0% 43.0% 43.0% Royalty rate and corresponding charge for the use of Brand Name 1.50% -377 -1,868 -1,380 -1,152 -966 -807 -670 -556 -461 -383 -318
9,435 48,555 36,166 30,878 26,210 22,330 18,534 15,383 12,768 10,597 8,796 Income tax expense 19.00% -1,793 -9,225 -6,871 -5,867 -4,980 -4,243 -3,521 -2,923 -2,426 -2,014 -1,671 After Tax EBITDA 7,642 39,330 29,294 25,011 21,230 18,087 15,013 12,460 10,342 8,584 7,125 Contributory Charge at 5.68% 5.68% -1,429 -7,072 -5,227 -4,363 -3,658 -3,056 -2,537 -2,105 -1,748 -1,450 -1,204 After Tax Cash Flow 6,213 32,258 24,067 20,649 17,572 15,031 12,476 10,355 8,595 7,134 5,921
Present value factor 15.0% 0.98 0.90 0.78 0.68 0.59 0.51 0.45 0.39 0.34 0.29 Present value of after tax cash flow 6,106 0 21,672 16,168 11,965 8,900 6,423 4,636 3,346 2,415 1,743 Sum, present value of after tax cash flow 83,374 Present value of tax benefit 9,865 Recommended Fair Value (rouded) 93,239 Net value of Customer Portfolio in ES books as of 30.09.08 94,869 Calculated impairment -1,630 PLN
-480 Euro
Eden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis
Appendix B5 Customers relationships - France
0.125 0.75 1.75 2.75 3.75 4.75 5.75 6.75 7.75 8.75 9.75 Currency: Euro'000 Notes Q408 Fcst FY08F FY09F FY10F FY11F FY12F FY13F FY14F FY15F FY16F FY17F FY18F N° of Clients (BoP) 49,100 55,955 * 48,401 41,867 36,006 30,965 26,630 22,902 19,695 16,938 14,567 12,527 Churn rate 13.5% 13.5% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% Monthly Revenue per Client in Euro 45.0 44.6 44.5 44.3 44.5 45.0 45.0 45.0 45.0 45.0 45.0 45.0
Revenue 6,629 30,400 24,102 20,699 17,881 15,551 13,373 11,501 9,891 8,506 7,315 6,291 Net revenue growth rate -20.7% -14.1% -13.6% -13.0% -14.0% -14.0% -14.0% -14.0% -14.0% -14.0% COGS w/o Depr. 1,657 7,205 5,640 4,740 4,005 3,390 2,915 2,507 2,156 1,854 1,595 1,371 % of revenue 25.0% 23.7% 23.4% 22.9% 22.4% 21.8% 21.8% 21.8% 21.8% 21.8% 21.8% 21.8% Gross Profit 4,971 23,195 18,462 15,959 13,876 12,161 10,458 8,994 7,735 6,652 5,721 4,920 Operating cost** w/o Depr. 3,513 15,930 12,412 10,515 8,976 7,729 6,647 5,716 4,916 4,228 3,636 3,127 % of revenue 53.0% 52.4% 51.5% 50.8% 50.2% 49.7% 49.7% 49.7% 49.7% 49.7% 49.7% 49.7% EBITDA 1,458 7,266 6,049 5,444 4,899 4,432 3,811 3,278 2,819 2,424 2,085 1,793 % of revenue 22.0% 23.9% 25.1% 26.3% 27.4% 28.5% 28.5% 28.5% 28.5% 28.5% 28.5% 28.5% Royalty rate and corresponding charge for the use of Brand Name 1.00% -66 -304 -241 -207 -179 -156 -134 -115 -99 -85 -73 -63
1,392 6,962 5,808 5,237 4,721 4,276 3,678 3,163 2,720 2,339 2,012 1,730 Income tax expense 34.00% -473 -2,367 -1,975 -1,780 -1,605 -1,454 -1,250 -1,075 -925 -795 -684 -588 After Tax EBITDA 919 4,595 3,834 3,456 3,116 2,822 2,427 2,087 1,795 1,544 1,328 1,142 Contributory Charge at 5.68% 5.68% -376 -1,727 -1,369 -1,176 -1,016 -883 -760 -653 -562 -483 -416 -357 After Tax Cash Flow 542 2,868 2,465 2,281 2,100 1,939 1,668 1,434 1,233 1,061 912 785
Present value factor 11.0% 0.99 0.92 0.83 0.75 0.68 0.61 0.55 0.49 0.45 0.40 0.36 Present value of after tax cash flow 535 0 2,279 1,900 1,576 1,311 1,016 787 610 472 366 284 Sum, present value of after tax cash flow 11,136 Present value of tax benefit 3,011 Recommended Fair Value (rouded) 14,147 Net value of Customer Portfolio in ES books as of 30.09.08 9,019 No impairment -
Eden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis
Appendix B6 Customers relationships - Spain
0.125 0.75 1.75 2.75 3.75 4.75 5.75 6.75 Currency: Euro'000 Notes Q408 Fcst FY08F FY09F FY10F FY11F FY12F FY13F FY14F FY15F N° of Clients (BoP) 29,500 35,746 * 29,133 23,743 19,470 16,160 13,413 11,132 9,240 Churn rate 18.5% 18.5% 18.0% 17.0% 17.0% 17.0% 17.0% 17.0% Monthly Revenue per Client in Euro 36.5 37.5 37.5 37.7 38.0 38.0 38.0 38.0 38.0
Revenue 3,230 16,866 11,897 9,775 8,123 6,742 5,596 4,645 3,855 Net revenue growth rate -29.5% -17.8% -16.9% -17.0% -17.0% -17.0% -17.0% COGS w/o Depr. 711 3,542 2,475 2,033 1,682 1,382 1,147 929 771 % of revenue 22.0% 21.0% 20.8% 20.8% 20.7% 20.5% 20.5% 20.0% 20.0% Gross Profit 2,520 13,324 9,423 7,742 6,442 5,360 4,449 3,716 3,084 Operating cost** w/o Depr. 1,437 7,236 5,044 4,115 3,355 2,771 2,300 1,904 1,581 % of revenue 44.5% 42.9% 42.4% 42.1% 41.3% 41.1% 41.1% 41.0% 41.0% EBITDA 1,082 6,089 4,378 3,626 3,087 2,589 2,149 1,812 1,504 % of revenue 33.5% 36.1% 36.8% 37.1% 38.0% 38.4% 38.4% 39.0% 39.0% Royalty rate and corresponding charge for the use of Brand Name 1.50% -48 -253 -178 -147 -122 -101 -84 -70 -58
1,034 5,836 4,200 3,480 2,965 2,488 2,065 1,742 1,446 Income tax expense 32.00% -331 -1,867 -1,344 -1,114 -949 -796 -661 -557 -463 After Tax EBITDA 703 3,968 2,856 2,366 2,016 1,692 1,404 1,184 983 Contributory Charge at 5.68% 5.68% -183 -958 -676 -555 -461 -383 -318 -264 -219 After Tax Cash Flow 519 3,010 2,180 1,811 1,555 1,309 1,086 921 764
Present value factor 11.0% 0.99 0.92 0.83 0.75 0.68 0.61 0.55 0.49 Present value of after tax cash flow 513 0 2,016 1,509 1,167 885 662 505 378 Sum, present value of after tax cash flow 7,634 Present value of tax benefit 1,746 Recommended Fair Value (rouded) 9,380 Net value of Customer Portfolio in ES books as of 30.09.08 9,669 Calculated impairment -289
Eden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis
Appendix B7 Customers relationships - Switzerland
0.125 0.75 1.75 2.75 3.75 4.75 5.75 6.75 Currency: CHF'000 Notes Q408 Fcst FY08F FY09F FY10F FY11F FY12F FY13F FY14F FY15F N° of Clients (BoP) 20,600 23,073 * 19,843 17,263 15,019 13,142 11,565 10,177 8,956 Churn rate 14.0% 13.0% 13.0% 12.5% 12.0% 12.0% 12.0% 12.0% Monthly Revenue per Client in CHF 67.00 68.10 70.10 72.20 74.40 75.90 75.90 75.90 75.90
Revenue 4,141 19,350 15,607 13,985 12,571 11,251 9,901 8,713 7,667 Net revenue growth rate -19.3% -10.4% -10.1% -10.5% -12.0% -12.0% -12.0% COGS w/o Depr. 828 3,735 2,950 2,643 2,363 2,126 1,881 1,655 1,457 % of revenue 20.0% 19.3% 18.9% 18.9% 18.8% 18.9% 19.0% 19.0% 19.0% Gross Profit 3,312 15,615 12,657 11,342 10,208 9,125 8,020 7,057 6,211 Operating cost** w/o Depr. 1,905 8,727 6,945 6,195 5,569 4,984 4,406 3,877 3,412 % of revenue 46.0% 45.1% 44.5% 44.3% 44.3% 44.3% 44.5% 44.5% 44.5% EBITDA 1,408 6,889 5,712 5,146 4,639 4,140 3,614 3,180 2,799 % of revenue 34.0% 35.6% 36.6% 36.8% 36.9% 36.8% 36.5% 36.5% 36.5% Royalty rate and corresponding charge for the use of Brand Name 1.50% -62 -290 -234 -210 -189 -169 -149 -131 -115
1,346 6,598 5,478 4,937 4,450 3,972 3,465 3,050 2,684 Income tax expense 24.00% -323 -1,584 -1,315 -1,185 -1,068 -953 -832 -732 -644 After Tax EBITDA 1,023 5,015 4,163 3,752 3,382 3,018 2,634 2,318 2,040 Contributory Charge at 5.68% 5.68% -235 -1,099 -886 -794 -714 -639 -562 -495 -436 After Tax Cash Flow 788 3,916 3,277 2,957 2,668 2,379 2,071 1,823 1,604
Present value factor 11.0% 0.99 0.92 0.83 0.75 0.68 0.61 0.55 0.49 Present value of after tax cash flow 777 0 3,030 2,464 2,002 1,609 1,262 1,000 793 Sum, present value of after tax cash flow 12,937 Present value of tax benefit 2,367 Recommended Fair Value (rouded) 15,305 Net value of Customer Portfolio in ES books as of 30.09.08 11,860 No impairment -
Eden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis
Appendix B8 Customers relationships - Baltics
0.125 0.75 1.75 2.75 3.75 4.75 5.75 6.75 Currency: Euro'000 Notes Q408 Fcst FY08F FY09F FY10F FY11F FY12F FY13F FY14F FY15F N° of Clients (BoP) 13,358 17,942 * 15,430 13,116 11,017 9,144 7,590 6,299 5,229 Churn rate 14.0% 15.0% 16.0% 17.0% 17.0% 17.0% 17.0% 17.0% Monthly Revenue per Client in Euro 14.5 15.1 15.4 15.9 16.0 16.2 16.2 16.2 16.2
Revenue 581 3,367 2,638 2,302 1,935 1,627 1,350 1,121 930 Net revenue growth rate -21.7% -12.7% -15.9% -16.0% -17.0% -17.0% -17.0% COGS w/o Depr. 163 909 699 601 497 413 343 285 236 % of revenue 28.0% 27.0% 26.5% 26.1% 25.7% 25.4% 25.4% 25.4% 25.4% Gross Profit 418 2,458 1,939 1,701 1,438 1,213 1,007 836 694 Operating cost** w/o Depr. 308 1,727 1,332 1,151 956 797 662 549 456 % of revenue 53.0% 51.3% 50.5% 50.0% 49.4% 49.0% 49.0% 49.0% 49.0% EBITDA 110 731 607 550 482 416 346 287 238 % of revenue 19.0% 21.7% 23.0% 23.9% 24.9% 25.6% 25.6% 25.6% 25.6% Royalty rate and corresponding charge for the use of Brand Name 1.50% -9 -51 -40 -35 -29 -24 -20 -17 -14
102 680 567 516 453 392 325 270 224 Income tax expense 18.00% -18 -122 -102 -93 -82 -71 -59 -49 -40 After Tax EBITDA 83 558 465 423 371 321 267 221 184 Contributory Charge at 5.68% 5.68% -33 -191 -150 -131 -110 -92 -77 -64 -53 After Tax Cash Flow 50 366 315 292 261 229 190 158 131
Present value factor 14.0% 0.98 0.91 0.80 0.70 0.61 0.54 0.47 0.41 Present value of after tax cash flow 50 0 286 232 182 140 102 74 54 Sum, present value of after tax cash flow 1,120 Present value of tax benefit 125 Recommended Fair Value (rouded) 1,245 Net value of Customer Portfolio in ES books as of 30.09.08 2,113 Calculated impairment -868
Eden Springs Ltd. European business and operations September 30, 2008 - Impairment analysis
Appendix B9 Customers relationships - Italy
0.125 0.75 1.75 2.75 3.75 4.75 5.75 6.75 Currency: Euro'000 Notes Q408 Fcst FY08F FY09F FY10F FY11F FY12F FY13F FY14F FY15F N° of Clients (BoP) 6,640 7,226 6,503 5,853 5,268 4,741 4,267 3,840 3,456 Churn rate 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Monthly Revenue per Client in Euro 19.0 19.6 19.6 19.6 19.6 19.6 19.6 19.6 19.6
Revenue 378 1,650 1,453 1,308 1,177 1,059 953 858 772 Net revenue growth rate -11.9% -10.0% -10.0% -10.0% -10.0% -10.0% -10.0% COGS w/o Depr. 106 446 392 353 318 286 257 232 209 % of revenue 28.0% 27.0% 27.0% 27.0% 27.0% 27.0% 27.0% 27.0% 27.0% Gross Profit 273 1,205 1,061 955 859 773 696 626 564 Operating cost** w/o Depr. 227 969 796 717 645 581 522 470 423 % of revenue 60.0% 58.7% 54.8% 54.8% 54.8% 54.8% 54.8% 54.8% 54.8% EBITDA 45 236 264 238 214 193 174 156 141 % of revenue 12.0% 14.3% 18.2% 18.2% 18.2% 18.2% 18.2% 18.2% 18.2% Royalty rate and corresponding charge for the use of Brand Name 1.50% -6 -25 -22 -20 -18 -16 -14 -13 -12
40 211 243 218 197 177 159 143 129 Income tax expense 34.00% -14 -72 -83 -74 -67 -60 -54 -49 -44 After Tax EBITDA 26 139 160 144 130 117 105 95 85 Contributory Charge at 5.68% 5.68% -21 -94 -83 -74 -67 -60 -54 -49 -44 After Tax Cash Flow 5 46 78 70 63 57 51 46 41