Note 3: Acquisitions

On January 3, 2012, the Company completed the acquisition of a majority of the North American foodservice coffee and hot beverage business of Sara Lee Corporation (“Sara Lee foodservice business”), including a liquid coffee manufacturing facility in Suffolk, Virginia, for $420.6 million in an all-cash transaction. Utilizing proceeds from the 3.50 percent Notes issued in October 2011, the Company paid Sara Lee Corporation, recently renamed The Hillshire Brands Company, $375.6 million, net of a working capital adjustment, and will pay an additional $50.0 million in declining installments over the next 10 years to a subsidiary of D.E Master Blenders 1753 N.V., an independent public company recently separated from The Hillshire Brands Company. The additional $50.0 million obligation was included in other current liabilities and other noncurrent liabilities in the Condensed Consolidated Balance Sheet and recorded at a present value of $45.0 million as of the date of acquisition. During the six months ended October 31, 2012, $10.0 million was paid and included in other – net financing on the Condensed Statement of Consolidated Cash Flows.

Total one-time costs related to the acquisition are estimated to be approximately $25.0 million, consisting primarily of transition services provided by Sara Lee Corporation and employee separation and relocation costs, nearly all of which are cash related. The Company has incurred one-time costs of $22.6 million through October 31, 2012, directly related to the merger and integration of the acquired business, and the charges were reported in other restructuring and merger and integration costs in the Condensed Statements of Consolidated Income. The Company expects the remainder of the costs to be incurred through fiscal 2014.

The acquisition included the market-leading liquid coffee concentrate business sold under the licensed Douwe Egberts® brand, along with a variety of roast and ground coffee, cappuccino, tea, and cocoa products, sold through foodservice channels in North America. Liquid coffee concentrate adds a unique, high-quality, and technology-driven form of coffee to the Company’s existing foodservice product offering.

During the quarter, the Company announced its plan to exit the private label roast and ground coffee business that was assumed with the acquisition of the Sara Lee foodservice business. While the Company anticipates a future reduction of $75.0 to $100.0 million in annual net sales, the exit of the business is expected to improve profit margins for the segment. The Company expects to complete the exit during fiscal 2014.

The purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their fair values at the date of acquisition. The Company determined the estimated fair values based on independent appraisals, discounted cash flow analyses, and estimates made by management. The purchase price exceeded the fair value of the net identifiable tangible and intangible assets acquired, and, as such, the excess was allocated to goodwill. The amount allocated to goodwill was primarily attributable to anticipated synergies and market expansion. The following table summarizes the fair values of the assets acquired and liabilities assumed at the acquisition date.

Assets acquired:
Cash and cash equivalents		$ 1,221
Other current assets		42,619
Property, plant, and equipment		92,775
Intangible assets		138,900
Goodwill		149,948
Other noncurrent assets		863
Total assets acquired		$ 426,326
Liabilities assumed:
Current liabilities		$ 3,599
Noncurrent liabilities		2,097
Total liabilities assumed		$ 5,696
Net assets acquired		$ 420,630

Of the total goodwill assigned to the International, Foodservice, and Natural Foods segment, $138.5 million is deductible for tax purposes.

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

Intangible assets with finite lives:
Customer relationships (10-year useful life)	$ 92,000
Technology (10-year useful life)	23,800
Trademark (6-year weighted-average useful life)	23,100
Total intangible assets	$ 138,900

On May 16, 2011, the Company completed the acquisition of the coffee brands and business operations of Rowland Coffee Roasters, Inc. (“Rowland Coffee”), a privately-held company headquartered in Miami, Florida, for $362.8 million. The acquisition included a manufacturing, distribution, and office facility in Miami. The Company utilized cash on hand and borrowed $180.0 million under its revolving credit facility to fund the transaction. In addition, the Company has incurred one-time costs of $11.9 million through October 31, 2012, directly related to the merger and integration of Rowland Coffee, which includes approximately $5.3 million in noncash expense items that were reported in cost of products sold. The remaining charges were reported in other restructuring and merger and integration costs in the Condensed Statements of Consolidated Income. Total one-time costs related to the acquisition are estimated to be approximately $25.0 million, including approximately $10.0 million of noncash charges, primarily accelerated depreciation, associated with consolidating coffee production currently in Miami into the Company’s existing facilities in New Orleans, Louisiana. The Company expects these costs to be incurred through fiscal 2015.

The acquisition of Rowland Coffee, a leading producer of espresso coffee in the U.S., strengthens and broadens the Company’s leadership in the U.S. retail coffee category by adding the leading Hispanic brands, Café Bustelo® and Café Pilon®, to the Company’s portfolio of brands.

Assets acquired:
Current assets		$ 33,971
Property, plant, and equipment		29,227
Intangible assets		213,500
Goodwill		91,675
Total assets acquired		$ 368,373
Liabilities assumed:
Current liabilities		$ 5,527
Total liabilities assumed		$ 5,527
Net assets acquired		$ 362,846

Goodwill of $84.8 million and $6.9 million was assigned to the U.S. Retail Coffee and the International, Foodservice, and Natural Foods segments, respectively. Of the total goodwill, $85.6 million is deductible for tax purposes.

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

Intangible assets with finite lives:
Customer relationships (19-year weighted-average useful life)	$ 147,800
Trademark (10-year useful life)	1,600
Intangible assets with indefinite lives:
Trademarks	64,100
Total intangible assets	$ 213,500

If the Sara Lee foodservice business and Rowland Coffee acquisitions had occurred on May 1, 2011, pro forma consolidated net sales would have been approximately $2.9 billion for the six months ended October 31, 2011, and the contribution of the acquired businesses would not have had a material impact to reported consolidated earnings for the six months ended October 31, 2011. The pro forma consolidated results do not give effect to the synergies of the acquisitions and are not indicative of operations in current or future periods.