Acquisitions and Divestitures

9 Months Ended

Jul. 01, 2018

Fiscal 2018

On March 23, 2018, we sold our company-operated retail store assets and operations in Brazil to SouthRock converting these operations to a fully licensed market, for a total of $48.2 million. This transaction resulted in a pre-tax loss of $8.5 million, which was included in net gain from divestiture of certain operations on our consolidated statements of earnings.

On December 31, 2017, we acquired the remaining 50% interest of our East China joint venture (“East China”) from President Chain Store (Hong Kong) Holding Ltd. and Kai Yu (BVI) collectively, “Uni-President Group” or “UPG”, for approximately $1.4 billion. Approximately $90.5 million of pre-existing liabilities owed by East China to Starbucks were effectively settled upon the acquisition. Acquiring the remaining interest of East China, which operates over 1,400 stores in the Shanghai, Jiangsu and Zhejiang Provinces, builds on the Company's ongoing investment in China. The estimated fair values of the assets acquired and liabilities assumed are based on third party valuation and analysis performed by management. The valuation of certain assets and liabilities is preliminary and are subject to change as additional information becomes available.

Concurrently, with the purchase of our East China joint venture, we sold our 50% interest in President Starbucks Coffee Taiwan Limited, our joint venture operations in Taiwan, to UPG for approximately $181.2 million. The transaction resulted in a pre-tax gain of $156.6 million which was included in net gain from divestiture of certain operations on our consolidated statements of earnings.

The following table summarizes the preliminary allocation of the total consideration to the fair values of the assets acquired and liabilities assumed as of December 31, 2017, which are reported within our China/Asia Pacific segment (in millions):



Consideration:
Cash paid for UPG 50% equity interest	$	1,440.8
Fair value of our pre-existing 50% equity interest	1,440.8
Settlement of pre-existing liabilities	90.5
Total consideration	$	2,972.1

Fair value of assets acquired and liabilities assumed:
Cash and cash equivalents	$	129.5
Accounts receivable	14.3
Inventories	16.1
Prepaid expenses and other current assets	20.6
Property, plant and equipment	254.1
Other long-term assets	44.6
Other intangible assets	818.0
Goodwill	2,164.1
Total assets acquired	3,461.3
Accounts payable	34.7
Accrued liabilities	187.7
Stored value card liability	21.7
Other long-term liabilities	245.1
Total liabilities assumed	489.2
Total consideration	$	2,972.1

As a result of this acquisition, we remeasured the carrying value of our preexisting 50% equity method investment to fair value, which resulted in a total gain of $1.4 billion that is not subject to income tax, and was presented as gain resulting from acquisition of joint venture on our consolidated statements of earnings. The fair value of $1.4 billion was calculated using an income approach, which was based on significant inputs that are not observable in the market and thus represents a fair value measurement categorized within Level 3 of the fair value hierarchy. Key assumptions used in estimating future cash flows included projected revenue growth and operating expenses, as well as the selection of an appropriate discount rate. Estimates of revenue growth and operating expenses were based on internal projections and considered the historical performance of stores, local market economics and the business environments impacting store performance. The discount rate applied was based on East China's weighted-average cost of capital and included company-specific and size risk premiums.

The assets acquired and liabilities assumed are reported within our China/Asia Pacific segment. Other current and long-term assets acquired primarily include lease deposits and prepaid rent. Accrued liabilities and other long-term liabilities assumed primarily include deferred income tax, dividend payable, accrued payroll, income tax payable and accrued occupancy costs.

The definite-lived intangibles primarily relate to reacquired rights to operate stores exclusively in East China. The reacquired rights of $798.0 million represent the fair value calculated over the remaining original contractual period and will be amortized on a straight-line basis through September 2022. Amortization expense for these definite-lived intangible assets for the quarter and three quarters ended July 1, 2018 was $44.3 million and $88.8 million, respectively. The estimated future amortization expense is approximately $42.7 million in fiscal 2018, $170.7 million each year for the next three years and approximately $163.8 million in the final year of fiscal 2022.

Goodwill represents the intangible assets that do not qualify for separate recognition and primarily includes the acquired customer base, the acquired workforce including store partners in the region that have strong relationships with these customers, and the existing geographic retail and online presence. The entire balance was allocated to the China/Asia Pacific segment and is not deductible for income tax purposes. Due to foreign currency translation, the balance of goodwill related to the acquisition decreased $37.9 million since the date of acquisition to $2.1 billion as of July 1, 2018.

The table below summarizes our estimated minimum future rental payments under the acquired non-cancelable operating leases as of July 1, 2018 (in millions):



	Operating Leases
Year 1	$	69.8
Year 2	60.8
Year 3	52.7
Year 4	45.1
Year 5	35.9
Thereafter	78.3
Total minimum lease payments	$	342.6

We began consolidating East China's results of operations and cash flows into our consolidated financial statements after December 31, 2017. For the quarter ended and three quarters ended July 1, 2018, East China's revenue included in our consolidated statements of earnings was $301.0 million and $602.6 million, respectively. For the quarter ended and three quarters ended July 1, 2018, East China's net earnings included in our consolidated statements of earnings was $19.2 million and $45.5 million, respectively.

The following table provides the supplemental pro forma revenue and net earnings of the combined entity had the acquisition date of East China been October 3, 2016, the first day of our first quarter of fiscal 2017, rather than the end of our first quarter of fiscal 2018 (in millions):



	Pro Forma (unaudited)
	Quarter Ended				Three Quarters Ended
	Jul 1, 2018		Jul 2, 2017 ⁽¹⁾		Jul 1, 2018		Jul 2, 2017 ⁽¹⁾
Revenue	$	6,310.3	$	5,896.5	$	18,686.8	$	17,360.6
Net earnings attributable to Starbucks	802.9		773.1		2,494.5		3,331.6


⁽¹⁾	The pro forma net earnings attributable to Starbucks for fiscal 2017 includes the acquisition-related gain of $2.5 million and $1,376.4 million and transaction and integration costs of $18.3 million and $30.7 million for the quarter and three quarters ended July 2, 2017, respectively.

The amounts in the supplemental pro forma earnings for the periods presented above fully eliminate intercompany transactions, apply our accounting policies and reflect adjustments for additional occupancy costs as well as depreciation and amortization that would have been charged assuming the same fair value adjustments to leases, property, plant and equipment and acquired intangibles had been applied on October 3, 2016. These pro forma results are unaudited and are not necessarily indicative of results of operations that would have occurred had the acquisition actually closed in the prior year period or indicative of the results of operations for any future period.

During the three quarters ended July 1, 2018, we incurred approximately $3.5 million of acquisition-related costs, such as regulatory, legal, and advisory fees, which were recorded in general and administrative expenses.

On December 11, 2017, we sold the assets associated with our Tazo brand including Tazo^® signature recipes, intellectual property and inventory to Unilever for a total of $383.8 million. The transaction resulted in a pre-tax gain of $347.9 million, which was included in the net gain from divestiture of certain operations on our consolidated statements of earnings. Results from Tazo operations prior to the sale are reported primarily in Channel Development.

Fiscal 2017

In the fourth quarter of fiscal 2017, we sold our company-operated retail store assets and operations in Singapore to Maxim's Caterers Limited, converting these operations to a fully licensed market, for a total of $119.9 million. This transaction resulted in a pre-tax gain of $83.9 million, which was included in interest income and other, net on our consolidated statements of earnings. An insignificant settlement related to the divestiture was received in the first quarter of fiscal 2018 and included in gains from divestiture of certain operations on our consolidated statements of earnings.


Note 2:	Acquisitions and Divestitures

Fiscal 2018



Consideration:
Cash paid for UPG 50% equity interest	$	1,440.8
Fair value of our pre-existing 50% equity interest	1,440.8
Settlement of pre-existing liabilities	90.5
Total consideration	$	2,972.1

Fair value of assets acquired and liabilities assumed:
Cash and cash equivalents	$	129.5
Accounts receivable	14.3
Inventories	16.1
Prepaid expenses and other current assets	20.6
Property, plant and equipment	254.1
Other long-term assets	44.6
Other intangible assets	818.0
Goodwill	2,164.1
Total assets acquired	3,461.3
Accounts payable	34.7
Accrued liabilities	187.7
Stored value card liability	21.7
Other long-term liabilities	245.1
Total liabilities assumed	489.2
Total consideration	$	2,972.1

The table below summarizes our estimated minimum future rental payments under the acquired non-cancelable operating leases as of July 1, 2018 (in millions):



	Operating Leases
Year 1	$	69.8
Year 2	60.8
Year 3	52.7
Year 4	45.1
Year 5	35.9
Thereafter	78.3
Total minimum lease payments	$	342.6



	Pro Forma (unaudited)
	Quarter Ended				Three Quarters Ended
	Jul 1, 2018		Jul 2, 2017 ⁽¹⁾		Jul 1, 2018		Jul 2, 2017 ⁽¹⁾
Revenue	$	6,310.3	$	5,896.5	$	18,686.8	$	17,360.6
Net earnings attributable to Starbucks	802.9		773.1		2,494.5		3,331.6


⁽¹⁾	The pro forma net earnings attributable to Starbucks for fiscal 2017 includes the acquisition-related gain of $2.5 million and $1,376.4 million and transaction and integration costs of $18.3 million and $30.7 million for the quarter and three quarters ended July 2, 2017, respectively.

Fiscal 2017