Acquisitions

Fiscal Year 2014 Acquisitions

On May 20, 2014, Apollo Global acquired an 81% consolidated interest in Milpark Education, a provider of education and training to adult learners in South Africa, for approximately ZAR 265 million (approximated $26 million on the transaction date). This acquisition, along with the Open Colleges acquisition described below, provides access to new markets and supports our strategy to diversify and expand our global operations.

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. 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 $49.0 million as of August 31, 2014) that was principally based on Open Colleges’ operating results for its fiscal year ended 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 included estimated operating results for the performance period, probability weightings assigned to the operating results scenarios and the discount rate applied. Based on Open Colleges’ operating results for the performance period, we paid A$37.8 million (equivalent to $35.2 million as of August 31, 2014) in the first quarter of fiscal year 2015 to settle the contingent consideration. For further discussion of the contingent consideration, refer to Note 9, Fair Value Measurements.

We also have the option to buy the remaining noncontrolling interests associated with the above acquisitions, and the noncontrolling shareholders have the option to sell their shares to us. The options are exercisable in the third quarter of our fiscal year 2016 for Milpark Education and in early calendar 2017 for Open Colleges, or earlier in limited circumstances for both acquisitions. The price for the options is based on a formula specified at the respective acquisition dates and is principally based on a multiple of the respective acquired entity’s operating results as defined in the acquisition agreements. There is no minimum or maximum price for these options. Since the options are embedded in the shares owned by the respective noncontrolling shareholders and the shareholders have the option to redeem their shares, we have classified both of the noncontrolling interests as redeemable equity on our Consolidated Balance Sheets. Refer to Note 13, Shareholders’ Equity and Redeemable Noncontrolling Interests.

We incurred transaction costs of $0.7 million and $3.6 million for the Milpark Education and Open Colleges acquisitions, respectively, and these costs are included in contingent consideration charges and acquisition costs on our Consolidated Statements of Income. We accounted for the acquisitions as business combinations and allocated the purchase price to the assets acquired and liabilities assumed at fair value as summarized below:



	Milpark Education				Open Colleges
	Purchase Price Allocation ($ in thousands)			Weighted Average Useful Life (Years)	Purchase Price Allocation ($ in thousands)			Weighted Average Useful Life (Years)
Net working capital deficit⁽¹⁾	$	(307	)		$	(10,979	)
Property and equipment	518				2,684
Intangibles:
Course designations	—				20,652			5.0
Trademarks	5,778			Indefinite	17,919			10.0
Course curriculum	1,203			2.0	15,790			4.0
Customer relationships	2,149			2.5	5,238			1.0
Accreditation	1,270			Indefinite	976			4.0
Goodwill	22,227				127,656
Deferred taxes, net⁽¹⁾	(2,818		)		(9,279		)
Total assets acquired and liabilities assumed	30,020				170,657
Less: Fair value of redeemable noncontrolling interests	(2,669		)		(51,197		)
Total fair value of consideration transferred	27,351				119,460
Less: Fair value of contingent consideration	—				(21,371		)
Less: Cash acquired	(2,834		)		(3,152		)
Cash paid for acquisition, net of cash acquired	$	24,517			$	94,937

⁽¹⁾ Net working capital deficit and deferred taxes, net include approximately $6 million and $33 million of assumed liabilities related to the Milpark Education and Open Colleges acquisitions, respectively.

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 the substantial majority of the acquired intangibles. The course designations and trademarks for both acquisitions and the course curriculum for Open Colleges 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, cost savings method, or replacement cost approach.


•	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.

•

Redeemable noncontrolling interests - We estimated the fair value of the redeemable noncontrolling interests principally as the noncontrolling ownership percentage of the implied fair value of each acquired entity as a whole. We reduced the fair value of the Milpark Education noncontrolling interest for certain discounts including lack of control. Based on the terms of the Open Colleges acquisition, including the structure of the redemption options held by the noncontrolling shareholders and our future operating plans for the entity, we did not apply a discount to the fair value of the noncontrolling interest.

We recorded $22.2 million and $127.7 million of goodwill as a result of the Milpark Education and Open Colleges acquisitions, respectively, both of which are not expected to be deductible for tax purposes. The goodwill for both acquisitions 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 for both reporting units.

We assigned an indefinite useful life to the acquired Milpark Education trademark and accreditation intangibles as we believe they have the ability to generate cash flows indefinitely. In addition, there are no legal, regulatory, contractual, economic or other factors to limit the intangibles’ useful life and, as applicable, we intend to renew the intangible and renewal can be accomplished at little cost. We determined all of the other 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 finite-lived intangibles was 2.3 years and 5.9 years for Milpark Education and Open Colleges, respectively. Refer to Note 8, Goodwill and Intangibles, for the estimated future amortization of our finite-lived intangibles.

The operating results of Milpark Education and Open Colleges are included in our consolidated financial statements from the date of each respective acquisition. We have not provided pro forma information or the revenue and operating results of the acquired entities because their results of operations are not material, both individually and in the aggregate, to our consolidated results of operations.

Fiscal Year 2012 Acquisition

On September 12, 2011, we acquired all of the outstanding stock of Carnegie Learning, a publisher of research-based math curricula and adaptive learning software for a cash purchase price of $75.0 million. We accounted for the Carnegie Learning acquisition as a business combination and Carnegie Learning’s operating results are included in our consolidated financial statements from the date of acquisition. We have not provided pro forma information or the revenue and operating results of Carnegie Learning because its results of operations are not significant to our consolidated results of operations.

The acquisition purchase price allocation is summarized below:



($ in thousands)
Tangible assets (net of acquired liabilities)	$	(10,894	)
Finite-lived intangibles	37,000
Indefinite-lived intangibles	14,100
Goodwill	34,794
Allocated purchase price	75,000
Less: Cash acquired	(1,264		)
Acquisition, net of cash acquired	$	73,736

In a separate transaction completed on the same date, we acquired related technology from Carnegie Mellon University for $21.5 million payable over a 10-year period. We accounted for the technology acquired as an asset purchase. Accordingly, we recorded a $14.4 million asset and corresponding liability representing the present value of the future cash payments on the acquisition date using our incremental borrowing rate. The asset is included in intangible assets, net on our Consolidated Balance Sheets and is being amortized on a straight-line basis over a five-year useful life. The liability is included in debt on our Consolidated Balance Sheets and is being accreted over the 10-year period, with the accretion recorded in interest expense on our Consolidated Statements of Income.