Note 2—Acquisitions

HOD Water Business Acquisitions

During the year ended January 2, 2016, the Company acquired nine separate home and office delivery (“HOD”) water businesses for an aggregate cash purchase price of $12.6 million. The Company has accounted for all of these transactions as business combinations in accordance with U.S. GAAP. These acquisitions support the Company’s previously announced objective of strategic acquisitions where it expects to be able to leverage synergies with its existing business. Net assets, including goodwill, acquired have been allocated to the DSS reporting segment. All of the goodwill recorded is expected to be tax deductible.

DSS Acquisition

In December 2014, the Company completed the acquisition by merger of DSS Group, Inc. (“DSS Group”), parent company to DS Services of America, Inc., a leading bottled water and coffee direct-to-consumer services provider in the United States (the “DSS Acquisition”). The DSS Acquisition was consummated pursuant to an Agreement and Plan of Merger (the “DSS Merger Agreement”) dated November 6, 2014. Aggregate consideration was approximately $1.246 billion paid through a combination of incremental borrowings under the ABL facility (defined below) of $180.0 million, the issuance of $625.0 million of our 6.75% senior notes due January 1, 2020, assumption of existing $350.0 million senior notes due 2021 originally issued by DSS, the issuance of Series A Convertible First Preferred Shares (the “Convertible Preferred Shares”), having an aggregate value of approximately $116.1 million and Series B Non-Convertible First Preferred Shares (the “Non-Convertible Preferred Shares” and together with the Convertible Preferred Shares, the “Preferred Shares”), having an aggregate value of approximately $32.7 million. Pursuant to the terms and conditions set forth in the Merger Agreement, a portion of the aggregate consideration is being held in escrow to secure the indemnification obligations of DSS’s former security holders under the Merger Agreement. The Company amended its existing ABL facility in connection with the acquisition to increase the amount of borrowings available thereunder.

The total cash and stock consideration paid by us in the DSS Acquisition is summarized below:


(in millions of U.S. dollars)
Cash paid to sellers	$	449.7
Working capital adjustment		11.4
Cash paid on behalf of sellers for sellers expenses		25.3
Cash paid to retire term loan on behalf of sellers		317.3
Convertible Preferred Shares		116.1
Non-Convertible Preferred Shares		32.7

Total consideration	$	952.5

The estimated merger consideration was subject to adjustment upon the determination of actual working capital, net indebtedness and certain transaction related expenses, which adjustment was resolved in July 2015 by the payment of $11.4 million to the former security holders of DSS.

Our primary strategic reasons for the DSS Acquisition were to accelerate Cott’s acquisition based diversification outside of CSDs and shelf stable juices, broaden our distribution platform by adding a national direct-to-consumer distribution channel and extend our beverage portfolio into new and growing markets, including home and office bottled water delivery services, office coffee services and filtration services, while creating opportunities for revenue, cost synergies and growth prospects.

The DSS Acquisition was accounted for as a business combination which, among other things, requires that assets acquired and liabilities assumed be measured at their acquisition date fair values. The purchase price consideration of $952.5 million was allocated to the assets acquired and liabilities assumed based on management’s estimates of their fair values as of the acquisition date. Measurement period adjustments were recorded during the year ended January 2, 2016, primarily for adjustments to certain assets and liabilities existing at the acquisition date. Included as part of these adjustments to the initial purchase price allocation is the correction of $6.2 million of certain balance sheet classification errors previously identified at January 3, 2015. The results of operations of DSS have been included in our operating results beginning as of the acquisition date. We allocated the total purchase price to tangible assets, liabilities and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair values was recorded as goodwill.

The following table summarizes the allocation of the purchase price to the fair value of the assets acquired and liabilities assumed in connection with the DSS Acquisition.


(in millions of U.S. dollars)	As reported at January 3, 2015			Adjustments			As reported at January 2, 2016
Cash and cash equivalents	$	74.5		$	—		$	74.5
Accounts receivable		103.4			(0.8	)		102.6
Inventories		46.8			(0.4	)		46.4
Prepaid expenses and other current assets		8.8			—			8.8
Deferred income taxes		2.8			0.9			3.7
Property, plant & equipment¹		403.3			(13.3	)		390.0
Goodwill¹		556.9			17.5			574.4
Intangibles and other assets¹		417.2			16.8			434.0
Accounts payable and accrued liabilities		(110.2	)		(8.3	)		(118.5	)
Long-term debt		(406.0	)		—			(406.0	)
Deferred income tax liabilities¹		(129.1	)		1.2			(127.9	)
Other long-term liabilities		(27.3	)		(2.2	)		(29.5	)

Total	$	941.1		$	11.4		$	952.5

^1.

During the fourth quarter of the year ended January 2, 2016, we adopted ASU 2015-16 and as a result measurement period adjustments were recorded in the fourth quarter of 2015, resulting in a $22.7 million decrease to property, plant & equipment, a $16.8 million increase to intangibles and other assets and a $5.0 million increase to deferred income tax liabilities, with a corresponding increase to goodwill of $10.9 million. This measurement period adjustment resulted in a decrease of $4.8 million, $0.2 million, and $1.9 million in cost of sales, SG&A expenses, and income tax benefit, respectively, associated with a decrease in depreciation expense offset by an increase in amortization expense associated with the adjustment, of which $0.2 million of the total change in cost of sales and less than $0.1 million of the total change in SG&A expenses and income tax benefit, respectively, related to the prior year and with the remainder related to the nine months ended October 3, 2015.

The Company recognized $35.9 million of acquisition related costs associated with the DSS Acquisition that were expensed during 2014. These costs are included in acquisition and integration expenses on the Consolidated Statements of Operations. These costs do not include financing fees related to the Preferred Shares financing, which were approximately $0.4 million. The Preferred Shares issuance costs were adjusted to retained earnings.

Selected Financial Data (unaudited)

The following unaudited financial information from the acquisition date through January 3, 2015 represents the activity of DSS that has been combined with our operations as of the acquisition date.


(in millions of U.S. dollars)	For the period from December 12, 2014 through January 3, 2015
Revenue	$	28.7
Net loss		(2.8	)

Aimia Acquisition

In May 2014, our Cott U.K. reporting segment acquired 100% of the share capital of Aimia Foods Holdings Limited (the “Aimia Acquisition”), which includes its operating subsidiary company, Aimia Foods Limited (together referred as “Aimia”) pursuant to a Share Purchase Agreement dated May 30, 2014. Aimia produces and distributes hot chocolate, coffee and powdered beverages primarily through food service, vending and retail channels, and produces hot and cold cereal products on a contract manufacturing basis. The aggregate purchase price for the Aimia Acquisition was £52.1 million ($87.6 million) paid in cash, which included a payment for estimated closing balance sheet working capital, £19.9 million ($33.5 million) in deferred consideration paid in September 2014, and aggregate contingent consideration of up to £16.0 million ($23.6 million at exchange rates in effect on January 2, 2016), which is payable upon the achievement of certain measures related to Aimia’s performance during the twelve months ending July 1, 2016. The closing payment and deferred consideration payment were funded from ABL borrowings and available cash.

The total consideration paid by us for the Aimia Acquisition is summarized below:


(in millions of U.S. dollars)
Cash paid to sellers	$	80.4
Deferred consideration		33.5
Contingent consideration¹		17.9
Working capital payment		7.2

Total consideration	$	139.0

^1.	Represents the estimated present value of the contingent consideration based on probability of achievement of performance targets recorded at fair value.

Our primary reasons for the Aimia Acquisition were to diversify Cott’s product portfolio, packaging formats and channel mix, and enhance our customer offering and growth prospects.

The Aimia Acquisition was accounted for as a business combination which, among other things, requires that assets acquired and liabilities assumed be measured at their acquisition date fair values. Identified intangible assets, goodwill and property, plant and equipment were recorded at their estimated fair values. The results of operations of Aimia have been included in our operating results beginning as of the acquisition date. We allocated the total purchase price to tangible assets, liabilities and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair values was recorded as goodwill.

The sellers are entitled to contingent consideration of up to a maximum of £16.0 million ($23.6 million at exchange rates in effect on January 2, 2016), which will become due by us if and to the extent Aimia meets certain targets relating to net income plus interest, income taxes, depreciation and amortization (“EBITDA”) for the twelve months ending July 1, 2016. We estimated the fair value of the contingent consideration based on financial projections of the acquired business and estimated probabilities of achievement of the EBITDA targets. We believe that our estimates and assumptions are reasonable, but there is significant judgment involved. The acquisition date fair value of the contingent consideration was determined to be £10.6 million ($15.6 million at exchange rates in effect on January 2, 2016) using a present valued probability-weighted income approach. During the second quarter of 2015, we recorded a fair value adjustment of £0.4 million ($0.6 million at exchange rates in effect on July 4, 2015) to the contingent consideration based on our review of the key assumptions used to calculate the fair value at the acquisition date. During the fourth quarter of 2015, we recorded a fair value adjustment of £0.1 million ($0.2 million at exchange rates in effect on January 2, 2016) to the contingent consideration based on review of the key assumptions used to calculate the fair value at the acquisition date. Key assumptions include probability-adjusted EBITDA amounts with discount rates consistent with the level of risk of achievement. The change in the fair value adjustment of the contingent consideration was recognized in other (income) expense, net in the Consolidated Statement of Operations for the year ended January 2, 2016.

The following table summarizes the allocation of the purchase price to the fair value of the assets acquired and liabilities assumed in connection with the Aimia Acquisition.


(in millions of U.S. dollars)	Acquired Value
Cash	$	9.5
Accounts receivable		11.0
Inventories		9.6
Prepaid expenses and other assets		1.9
Property, plant & equipment		10.9
Goodwill		54.5
Intangibles and other assets		86.2
Accounts payable and accrued liabilities		(27.4	)
Deferred tax liabilities		(17.2	)

Total	$	139.0

The Company recognized $2.2 million of acquisition related costs associated with the Aimia Acquisition that were expensed during the fiscal year 2014. These costs are included in the acquisition and integration expenses on the Consolidated Statements of Operations.

Selected Financial Data (unaudited)

The following unaudited financial information from the acquisition date through January 3, 2015 represents the activity of Aimia that has been combined with our operations as of the acquisition date.


(in millions of U.S. dollars)	For the period from May 30, 2014 through January 3, 2015
Revenue	$	62.3
Net income		2.3

Calypso Soft Drinks Acquisition

In June 2013, our Cott U.K. reporting segment acquired 100% of the share capital of Cooke Bros Holdings Limited (the “Calypso Soft Drinks Acquisition”), which includes the subsidiary companies Calypso Soft Drinks Limited and Mr. Freeze (Europe) Limited (together, “Calypso Soft Drinks”). Calypso Soft Drinks produces fruit juices, juice drinks, soft drinks, and freezable products in the United Kingdom. The aggregate purchase price for the Calypso Soft Drinks Acquisition was $12.1 million, which included approximately $7.0 million paid at closing, deferred payments of approximately $2.3 million and $2.5 million, paid on the first and second anniversaries of the closing date, respectively. In connection with the Calypso Soft Drinks Acquisition, we paid $18.5 million of outstanding debt of the acquired companies. Each payment was funded from available cash.

The total consideration paid by us in the Calypso Soft Drinks Acquisition is summarized below:


(in millions of U.S. dollars)
Cash paid to sellers	$	7.0
Deferred consideration¹		5.1

Total consideration	$	12.1

^1.	Principal amount of $5.3 million discounted to present value.

Our primary reasons for the Calypso Soft Drinks Acquisition were to expand Cott’s product portfolio and enhance our customer offering and growth prospects.

The Calypso Soft Drinks Acquisition was accounted for as a business combination which, among other things, requires that assets acquired and liabilities assumed be measured at their acquisition date fair values. Identified intangible assets, goodwill and property, plant and equipment were recorded at their estimated fair values. The results of operations of Calypso Soft Drinks have been included in our operating results beginning as of the acquisition date. We allocated the total purchase price of the Calypso Soft Drinks Acquisition to tangible assets, liabilities and identifiable intangible assets acquired based on their estimated fair values. The excess of the purchase price over the aggregate fair values was recorded as goodwill. The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions made by management.

The following table summarizes the allocation of the purchase price to the fair value of the assets acquired and liabilities assumed in connection with the Calypso Soft Drinks Acquisition.


(in millions of U.S. dollars)	Acquired Value
Cash	$	0.5
Accounts receivable		15.9
Inventory		8.1
Prepaid expenses and other assets		0.6
Property, plant and equipment		8.7
Goodwill		8.5
Intangibles and other assets		15.0
Accounts payable and accrued liabilities		(15.0	)
Shareholder loans		(1.6	)
Deferred tax liabilities		(3.4	)
Other long-term liabilities		(25.2	)

Total	$	12.1

The Company recognized $1.7 million of acquisition-related costs associated with the Calypso Soft Drinks Acquisition that were expensed during 2013. These costs are included in acquisition and integration expenses on the Consolidated Statements of Operations.

Intangible Assets

In our determination of the estimated fair value of intangible assets, we consider, among other factors, the best use of acquired assets, analysis of historical financial performance and estimates of future performance of the acquired business’ products. The estimated fair values of identified intangible assets are calculated considering market participant assumptions and using an income approach and estimates and assumptions provided by management of the acquired business and our management.

The estimated fair value of customer relationships represent future after-tax discounted cash flows that will be derived from sales to existing customers of the acquired business as of the date of acquisition.

The estimated fair value of trademarks and trade names represent the future projected cost savings associated with the premium and brand image obtained as a result of owning the trademark or trade name as opposed to obtaining the benefit of the trademark or trade name through a royalty or rental fee.

The estimated fair value of non-competition agreements represent the future after-tax discounted cash flows that are expected to be retained by the acquired business as a result of preventing certain employees or prior owners from competing with us in the specified restricted territories for a period of time subsequent to the date of acquisition or the date of termination of their employment with us, as the case may be.

DSS Acquisition

The following table sets forth the components of identified intangible assets associated with the DSS Acquisition and their estimated weighted average useful lives:


	As Reported at January 3, 2015
(in millions of U.S. dollars)	Estimated Fair Market Value		Estimated Useful Life
Customer relationships	$	219.8		16 years
Trademarks and trade names		183.1		Indefinite
Non-competition agreements		0.4		5 years
Software		5.7		3 years

Total	$	409.0

Aimia Acquisition

The following table sets forth the components of identified intangible assets associated with the Aimia Acquisition and their estimated weighted average useful lives:


	As Reported at January 3, 2015
(in millions of U.S. dollars)	Estimated Fair Market Value		Estimated Useful Life
Customer relationships	$	76.5		15 years
Trademarks and trade names		1.5		20 years
Non-competition agreements		2.9		5 years

Total	$	80.9

Calypso Soft Drinks Acquisition

The following table sets forth the components of identified intangible assets associated with the Calypso Soft Drinks Acquisition and their estimated weighted average useful lives:


	As Reported at December 28, 2013
(in millions of U.S. dollars)	Estimated Fair Market Value		Estimated Useful Life
Customer relationships	$	10.7		15 years
Trademarks and trade names		3.0		20 years
Non-competition agreements		1.3		5 years

Total	$	15.0

Goodwill

DSS Acquisition

The principal factor that resulted in recognition of goodwill in the DSS Acquisition was that the purchase price was based in part on cash flow projections assuming the reduction of administration costs and the integration of acquired customers and products into our operations, which is of greater value than on a standalone basis. The goodwill recognized as part of the DSS Acquisition was allocated to the DSS reporting segment, a portion of which is expected to be tax deductible.

Aimia Acquisition

The principal factor that resulted in recognition of goodwill in the Aimia Acquisition was that the purchase price was based in part on cash flow projections assuming the reduction of administration costs and the integration of acquired customers and products into our operations, which is of greater value than on a standalone basis. The goodwill recognized as part of the Aimia Acquisition was allocated to the Cott U.K. reporting segment, none of which is expected to be tax deductible.

Calypso Soft Drinks Acquisition

The principal factor that resulted in recognition of goodwill in the Calypso Soft Drinks Acquisition was that the purchase price was based in part on cash flow projections assuming the reduction of administration costs and the integration of acquired customers and products into our operations, which is of greater value than on a standalone basis. The goodwill recognized as part of the Calypso Soft Drinks Acquisition was allocated to the Cott U.K. reporting segment, a portion of which is expected to be tax deductible.

Supplemental Pro Forma Data (unaudited)

The following unaudited financial information for the years ended January 3, 2015 and December 28, 2013 represent the combined results of operations as if the DSS Acquisition, the Aimia Acquisition and the Calypso Soft Drinks Acquisition had occurred on December 30, 2012. The unaudited pro forma results reflect certain adjustments related to these acquisitions such as increased amortization expense on acquired intangible assets resulting from the preliminary fair valuation of assets acquired. The unaudited pro forma financial information does not necessarily reflect the results of operations that would have occurred had we operated as a single entity during such periods.


	For the Year Ended
(in millions of U.S. dollars, except per share amounts)	January 3, 2015			December 28, 2013
Revenue	$	3,099.1		$	3,141.1
Net loss attributed to Cott Corporation		(8.1	)		(102.0	)
Net loss per common share attributed to Cott Corporation, diluted	$	(0.08	)	$	(1.08	)