CAPITEC BANK HOLDINGS LIMITED - Purchase Price Allocation On Acquisition Of Mercantile Bank Holdings Limited And Its Subsidiaries

Purchase Price Allocation On Acquisition Of Mercantile Bank Holdings Limited And Its Subsidiaries

Capitec Bank Holdings Limited
Registration number 1999/025903/06
Registered bank controlling company
Incorporated in the Republic of South Africa
JSE ordinary share code: CPI ISIN code: ZAE000035861
JSE preference share code: CPIP ISIN code: ZAE000083838
("Capitec" or "the company")

Capitec Bank Limited
Incorporated in the Republic of South Africa
Registration No. 1980/003695/06
Company code: BICAP
Stock Code: CBL20
ISIN Code: ZAG000102245
Stock Code: CBL22
ISIN Code: ZAG000105305
Stock Code: CBL24
ISIN Code: ZAG000130881
Stock Code: CBL26
ISIN Code: ZAG000136128
Stock Code: CBL27
ISIN Code: ZAG000143884
Stock Code: CBL28
ISIN Code: ZAG000151333
Stock Code: CBL29
ISIN Code: ZAG000158874
(“Capitec Bank” or “the bank”)

PURCHASE PRICE ALLOCATION ON ACQUISITION OF MERCANTILE BANK HOLDINGS
LIMITED AND ITS SUBSIDIARIES (“MERCANTILE”)

Capitec Bank concluded the purchase of Mercantile on 7 November 2019 for
R3.56 billion. Shareholders are referred to the SENS announcement of the
same date regarding the purchase and the payment of the purchase price.

This announcement provides detail on the acquisition date accounts of
Mercantile as well as the allocation of the purchase price to these
accounts and other intangibles identified.

Capitec Bank will consolidate Mercantile from the acquisition date and
Capitec Bank’s results for the year ending 29 February 2020 will include
the Mercantile earnings from 7 November 2019.

Capitec Bank determined the acquisition date accounting of Mercantile
through the following processes:
1. Obtaining the statement of financial position of Mercantile as at 7
    November 2019 which reflects a net asset value of R2.69 billion.
    Shareholders are referred to the SENS announcement dated 31 October
    2019 that disclosed Mercantile’s net asset value at R2.66 billion at
    30 September 2019. This date was used to determine the purchase
    price. The net asset value of R2.69 billion as at 7 November 2019
    was used to allocate the purchase price. The difference relates to
    Mercantile’s earnings for the month of October 2019.
2.  Obtaining an unqualified special purpose reasonable assurance
    opinion from Mercantile’s auditors reflecting a net asset value of
    R2.69 billion.
3.  Supplementing the Capitec accounting policies with those of
    Mercantile to the extent that they provide more granularity on the
    business banking segment. This did not result in adjustments to the
    net asset value of the acquisition date accounts.
4.  Applying IFRS 3 – Business combinations in order to determine the
    allocation of the purchase price to the acquired assets, assumed
    liabilities and residual goodwill.

The outcome of the purchase price allocation was as follows:

1.  Fair value of assets and liabilities
    A fair value exercise was performed on all assets and liabilities.
    No material differences were noted between net asset value and fair
    value.

2.  Identified intangible assets
    Core deposit and client relationship intangibles not previously
    recognised were identified. A value of R80.8 million and R17.7
    million was placed on the core deposit and client relationship
    intangibles respectively.

    The brand value was considered to be immaterial as Mercantile has
    less than 1% of the market share in South Africa and their
    geographical footprint is limited.

    The intangible assets raised through the business combination will
    be amortised over 7 years. It is expected that this will result in a
    post-tax charge of R3.38 million to Capitec’s income statement for
    the year ending 29 February 2020.

3.  Goodwill
    The net asset value of Mercantile of R2.69 billion as at 7 November
    2019 was increased by R98.5 million for intangible assets and offset
    by an increase in deferred tax of R27.6 million. The resultant fair
    value of identifiable net assets of R2.76 billion compared to the
    purchase price of R3.56 billion results in goodwill of R794.5
    million. This goodwill is attributable to future revenue expected to
    be generated from new business banking clients, the leveraging of
    the Capitec brand and the Mercantile business banking process. None
    of the goodwill recognised is expected to be deductible for tax
    purposes.
                                                                  R’000
Total consideration transferred                               3 555 772
Net asset value as at 7 November 2019                        (2 690 365)
Consideration less net asset value                              865 407

Core deposit intangible                                           80   780
Client relationship intangible                                    17   721
Deferred tax adjustment                                          (27   580)
Goodwill                                                         794   486
Consideration less net asset value                               865   407

The purchase price of R3.56 billion was paid in cash. Capitec Bank
incurred acquisition related costs of R9.5 million (mainly Securities
transfer tax) during the year and these will be included in operating
expenses for the year ending 29 February 2020.

Identifiable assets acquired and liabilities assumed at the date of
acquisition

                                                             Fair value
                                                                  R’000
Cash, cash equivalents and money market funds                 4 592 930
Financial investments                                           786 290
Net loans and advances                                       10 141 010
Trade and other receivables                                     376 532
Derivative financial instruments                                 62 445
Financial assets                                                  8 078
Property and equipment                                          239 579
Right-of-use asset                                               14 339
Intangible assets                                                96 836
Core deposit intangible                                          80 780
Client relationships intangible                                  17 721
Deferred income tax asset                                        42 434
Derivative financial instruments                               (59 412)
Current income tax liability                                   (34 654)
Deposits                                                   (11 743 652)
Other liabilities                                             (396 373)
Wholesale funding                                           (1 244 970)
Lease liability                                                (14 971)
Provisions                                                    (104 470)
Deferred income tax liability                                  (99 186)
Fair value of identifiable net assets                         2 761 286
including identified intangibles

Capitec Bank is eager to be of service to Mercantile’s clients. The
acquisition supports Capitec’s goal of expanding its offering as part of
a broader banking strategy.

10 December 2019
Stellenbosch

Sponsor PSG Capital
Date: 10-12-2019 11:25:00
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