Acquisitions

On March 23, 2015, we completed the acquisition of Big Heart Pet Brands (“Big Heart”), a leading producer, distributor, and marketer of premium-quality, branded pet food and pet snacks in the U.S., through the acquisition of Blue Acquisition Group, Inc. (“BAG”), Big Heart’s parent company. As a result of the acquisition, the assets and liabilities of BAG are now held by a direct wholly-owned subsidiary of the Company.

The total consideration paid in connection with the acquisition was $5.9 billion, as set forth below, which included the issuance of 17.9 million of our common shares to BAG’s shareholders, valued at $2.0 billion based on the average stock price of our common shares on March 23, 2015. After the closing of the transaction, we had approximately 120.0 million common shares outstanding. We assumed $2.6 billion in debt, including Big Heart’s senior secured term loan and senior notes, and we paid an additional $1.2 billion in cash, net of a working capital adjustment. As part of the transaction, new debt of $5.5 billion was borrowed, as discussed in Note 7: Debt and Financing Arrangements.

The following table summarizes the purchase price of the Big Heart acquisition.



Shares issued	$	2,035.5
Assumed debt from Big Heart	2,630.2
Cash consideration, net of cash acquired	1,232.1
Total purchase price	$	5,897.8

The transaction was accounted for under the acquisition method of accounting and, accordingly, the results of Big Heart’s operations, including $580.3 and $1.7 billion in revenue and $72.4 and $203.4 in operating income, are included in our condensed consolidated financial statements for the three and nine months ended January 31, 2016, respectively.

Total one-time costs related to the acquisition are anticipated to be approximately $225.0; however, the costs are trending higher than the original estimate for 2016 and we are in the process of evaluating the total expected one-time costs which will be updated as necessary by the end of 2016. The one-time costs are expected to primarily consist of employee-related costs, outside service and consulting costs, and other costs related to the acquisition, and are anticipated to be incurred primarily through 2018. We incurred costs of $44.4 and $102.9 during the three and nine months ended January 31, 2016, respectively, resulting in total costs of $138.9 from the date of acquisition, that were related to the merger and integration of Big Heart. The majority of these charges were reported in other special project costs in the Condensed Statement of Consolidated Income. The employee-related costs are recognized over the estimated future service period of the affected employees and the remaining costs are expensed as incurred. In addition, we anticipate synergies related to the Big Heart acquisition to result in net realized savings of approximately $200.0 annually by the end of 2018.

The Big Heart purchase price was preliminarily allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. We determined the estimated fair values based on independent appraisals, discounted cash flow analyses, quoted market prices, and estimates made by management. The purchase price exceeded the estimated fair value of the net identifiable tangible and intangible assets acquired and, as such, the excess was allocated to goodwill.

In accordance with ASU 2015-16, as discussed in Note 2: Recently Issued Accounting Standards, we will no longer revise prior period results for adjustments to preliminary amounts recognized as part of our business acquisition. Changes to these preliminary fair values during the second quarter of 2016 resulted in a net adjustment to goodwill of $1.1, which is attributable to the finalization of certain liabilities and the related impact on deferred taxes. There were no adjustments to goodwill during the third quarter of 2016.

During the first quarter of 2016, prior to our adoption of ASU 2015-16, changes to the preliminary fair values were retrospectively applied to the Condensed Consolidated Balance Sheet as of April 30, 2015. The changes included a net adjustment to goodwill of $1.8, which resulted from a favorable working capital adjustment and the finalization of the estimated fair value of an equity method investment. During the second quarter of 2016, the equity method investment was subsequently written off upon exiting the relationship with Natural Blend Vegetable Dehydration, LLC. The write off had an immaterial impact on the results of operations for the nine months ended January 31, 2016.

The following table summarizes the preliminary fair values at January 31, 2016, of the assets acquired and liabilities assumed at the acquisition date.



Assets acquired:
Trade receivables	$	142.0
Inventories	254.5
Other current assets	196.8
Property, plant, and equipment	324.0
Other intangible assets - net	4,009.8
Goodwill	2,874.1
Other noncurrent assets	28.3
Total assets acquired	$	7,829.5
Liabilities assumed:
Current liabilities	$	385.6
Deferred income taxes	1,464.0
Other noncurrent liabilities	82.1
Total liabilities assumed	$	1,931.7
Net assets acquired	$	5,897.8

As a result of the acquisition, we recognized a total of $2.9 billion of goodwill, of which $77.8 is remaining as deductible for tax purposes at January 31, 2016. Goodwill represents the value we expect to achieve through the implementation of operational synergies and growth opportunities across our segments. The final allocation of goodwill to our reporting units was not complete as of January 31, 2016. In addition, certain estimated values for the acquisition, including goodwill, intangible assets, contingent liabilities, and income taxes, are not yet finalized. The purchase price was preliminarily allocated based on information available at the acquisition date and is subject to change as we complete our analysis of the fair values of the assets and liabilities assumed at the date of acquisition during the measurement period as defined under FASB Accounting Standards Codification (“ASC”) 805, Business Combinations, which ends on March 23, 2016.

The purchase price was preliminarily allocated to the identifiable intangible assets acquired as follows:



Intangible assets with finite lives:
Customer relationships (25-year useful life)	$	2,289.8
Trademarks (15-year useful life)	257.0
Intangible assets with indefinite lives:
Trademarks	1,463.0
Total intangible assets	$	4,009.8

Big Heart’s results of operations are included in our consolidated financial statements from the date of the transaction. Had the transaction occurred at the beginning of the full comparable prior year period, the unaudited pro forma consolidated results would have been as follows:



	Three Months Ended January 31, 2015		Nine Months Ended January 31, 2015
Net sales	$	2,029.9	$	5,930.7
Net income	194.1		490.5
Net income per common share - assuming dilution	1.62		4.10

The unaudited pro forma consolidated results are based on our historical financial statements and those of Big Heart, and do not necessarily indicate the results of operations that would have resulted had the acquisition been completed at the beginning of the full comparable prior year period. The most significant pro forma adjustments relate to amortization of intangible assets, higher interest expense associated with the bank term loan and long-term notes, and the impact of additional common shares issued as a result of the acquisition. The unaudited pro forma consolidated results do not give effect to the synergies of the acquisition and are not indicative of the results of operations in future periods.

In addition to the Big Heart acquisition, on September 2, 2014, we completed the acquisition of Sahale Snacks, Inc. (“Sahale”), a privately-held manufacturer and marketer of premium, branded nut and fruit snacks for $80.5 in cash, net of a working capital adjustment. As a result, Sahale became a wholly-owned subsidiary of the Company. The purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The purchase price allocation included total intangible assets of $30.4. The purchase price exceeded the estimated fair value of the net identifiable tangible and intangible assets acquired and, as a result, the excess was allocated to goodwill. Valuations resulted in Sahale goodwill of $46.9, and the entire amount was assigned to the U.S. Retail Consumer Foods segment. The results of operations of Sahale are included in the condensed consolidated financial statements from the date of the transaction and did not have a material impact on the three and nine months ended January 31, 2016.