Acquisitions

On December 20, 2013, Apollo Global acquired 70% of the outstanding shares of Open Colleges, a provider of education and training to adult learners in Australia, which supports our strategy to expand our global operations. We paid A$110.3 million (equivalent to $98.1 million on the transaction date), plus contingent consideration of up to A$52.5 million (equivalent to $46.5 million on the transaction date) upon the satisfaction of specified conditions. If the applicable conditions are satisfied, the amount of the contingent consideration will be calculated principally on the basis of Open Colleges’ operating results for its fiscal year ending June 30, 2014 as defined in the acquisition agreement. On the acquisition date, we estimated the fair value of the contingent consideration to be $21.4 million using a discounted cash flow valuation method encompassing significant unobservable inputs. The inputs include estimated operating results for the performance period, probability weightings assigned to the operating results scenarios and the discount rate applied. We incurred $3.6 million of transaction costs in connection with this acquisition, which are included in acquisition costs and contingent consideration charges on our Condensed Consolidated Statements of Income in the three months ended February 28, 2014.

In connection with the acquisition, we also have the option to buy the remaining outstanding shares of Open Colleges, and the noncontrolling shareholders have the option to sell their shares to us, in early 2017, or earlier in limited circumstances. The prices for these options are based on a formula specified at the acquisition date and are principally based on a multiple of Open Colleges’ calendar year 2016 operating results as defined in the acquisition agreement, or an earlier measurement period in the limited circumstances that the options are exercised prior to 2017. There is no minimum or maximum price for these options. Since the options are embedded in the shares owned by the noncontrolling shareholders and the shareholders have the option to redeem their shares, we have classified the noncontrolling interests as redeemable equity on our Condensed Consolidated Balance Sheets. Refer to Note 12, Shareholders’ Equity and Redeemable Noncontrolling Interests.

We accounted for the acquisition as a business combination and allocated the purchase price to the assets acquired and liabilities assumed at fair value as summarized below:



($ in thousands)
Net working capital deficit	$	(10,979	)
Property and equipment	2,684
Intangibles:
Course designations (5 year useful life)	20,652
Trademark (10 year useful life)	17,919
Course curriculum (4 year useful life)	15,790
Customer relationships (1 year useful life)	5,238
Accreditations (4 year useful life)	976
Goodwill	127,656
Deferred taxes, net	(9,279		)
Total assets acquired and liabilities assumed	170,657
Less: Fair value of redeemable noncontrolling interests	(51,197		)
Total fair value of consideration transferred	119,460
Less: Fair value of contingent consideration	(21,371		)
Less: Cash acquired	(3,152		)
Cash paid for acquisition, net of cash acquired	$	94,937

We determined the fair value of assets acquired, liabilities assumed and the redeemable noncontrolling interests based on assumptions that reasonable market participants would use while employing the concept of highest and best use of the respective items. We used the following assumptions, the majority of which include significant unobservable inputs, and valuation methodologies to determine fair value:


•	Intangibles - We used income approaches to value all of the acquired intangibles. The trademark, course designations, and course curriculum were valued using the relief-from-royalty method, which represents the benefit of owning these intangible assets rather than paying royalties for their use. The remaining intangibles were valued using the excess earnings method or cost savings method.


•	Deferred revenue - Deferred revenue is included in net working capital deficit in the above table. We estimated the fair value of deferred revenue using the cost build-up method, which represents the cost to deliver the services, plus a normal profit margin.


•	Other assets and liabilities - The carrying value of all other assets and liabilities approximated fair value at the time of acquisition.

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Redeemable noncontrolling interests - We estimated the fair value of the redeemable noncontrolling interests as the noncontrolling ownership percentage of the implied fair value of Open Colleges as a whole. Based on the terms of the acquisition, including the redemption options held by the noncontrolling shareholders, we did not apply a discount for lack of control to the value of the noncontrolling interest.

We recorded $127.7 million of goodwill as a result of the Open Colleges acquisition, which is not expected to be deductible for tax purposes. The goodwill is principally attributable to the future earnings potential associated with student growth and other intangibles that do not qualify for separate recognition such as the assembled workforce. The goodwill is included in our Apollo Global reportable segment and we have selected a July 1 annual goodwill impairment test date.

We determined all of the acquired intangibles are finite-lived and we are amortizing them on either a straight-line or an accelerated basis that reflects the pattern in which we expect the economic benefits of the assets to be consumed. The weighted average original useful life of the acquired intangibles was 5.9 years. Refer to Note 7, Goodwill and Intangibles, for the estimated future amortization of our finite-lived intangibles.

Open Colleges’ operating results are included in our consolidated financial statements from date of acquisition. We have not provided pro forma information because Open Colleges’ results of operations are not significant to our consolidated results of operations.