Acquisitions

Fiscal Year 2015 Acquisition

On December 4, 2014, Apollo Global acquired a 75% interest in Sociedade Técnica Educacional da Lapa S.A., a provider of postsecondary educational programs in Brazil under the name Faculdade da Educacional da Lapa (“FAEL”). This acquisition provides access to a new market and supports our strategy to diversify and expand our global operations. We made an initial cash payment of R$73.8 million (equivalent to $28.9 million on the acquisition date), and the acquisition includes a potential contingent consideration payment in the future that is principally based on FAEL’s calendar year 2018 net revenue. The contingent payment has a maximum of approximately R$34 million (equivalent to $13.3 million on the acquisition date), and its fair value on the acquisition date was insignificant based on our estimate of FAEL’s future revenue in relation to the contingent payment threshold as defined in the acquisition agreement. We incurred $1.2 million of transaction costs in connection with this acquisition and these costs are included in acquisition and other related costs on our Condensed Consolidated Statements of Operations in the six months ended February 28, 2015.

In connection with the acquisition, we also have the option to buy the remaining noncontrolling interests, and the noncontrolling shareholders have the option to sell their shares to us, beginning in the third quarter of our fiscal year 2019, 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 FAEL’s operating results as defined in the acquisition agreement. 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. Subsequent to recording the noncontrolling interests at fair value on the acquisition date, as discussed further below, we record the redeemable noncontrolling interests at the greater of the carrying value or the redemption value because the interests are probable of becoming redeemable. We determine the redemption value using the formula specified at the acquisition date, and by assuming the end of each period is the redemption date. We record redemption value adjustments through retained earnings.

We accounted for the acquisition as a business combination and the following details our preliminary allocation of the purchase price to the assets acquired and liabilities assumed at fair value:



($ in thousands)
Cash and cash equivalents	$	7,685
Intangibles:
Trademark (indefinite useful life)	9,223
Accreditation (indefinite useful life)	5,940
Course curriculum (4 year useful life)	1,212
Other (4 year useful life)	4,182
Goodwill	14,538
Other assets	2,877
Liabilities	(13,369		)
Total assets acquired and liabilities assumed	32,288
Less: Fair value of redeemable noncontrolling interests	(3,437		)
Total fair value of consideration transferred	28,851
Less: Cash acquired	(7,685		)
Cash paid for acquisition, net of cash acquired	$	21,166

The above purchase price allocation is preliminary and subject to revision as we finalize the valuation of intangible assets, and as additional information about the fair value of other assets and liabilities becomes available.

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 trademark was valued using the relief-from-royalty method, which represents the benefit of owning the intangible asset rather than paying royalties for its use. We used the excess earnings method or the with and with-out method for the remaining intangibles valued using income approaches.


•	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 FAEL’s total equity. We reduced the fair value of the noncontrolling interest for certain discounts including lack of control.

We recorded $14.5 million of goodwill as a result of the FAEL acquisition, which may become deductible for tax purposes in the future. 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 assigned an indefinite useful life to the acquired 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 intangibles 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 4 years. Refer to Note 7, Goodwill and Intangibles, for the estimated future amortization of our finite-lived intangibles.

FAEL’s operating results are included in our consolidated financial statements from date of acquisition. We have not provided pro forma information or FAEL’s revenue and operating results because the results of operations are not material to our consolidated results of operations.

Fiscal Year 2014 Acquisition

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, which we initially measured at $21.4 million based on information available as of the acquisition date. We settled the contingent consideration during fiscal year 2015 as discussed at Note 8, Fair Value Measurements.

We accounted for the Open Colleges acquisition as a business combination and Open Colleges’ operating results are included in our consolidated financial statements from the date of acquisition. We have not provided pro forma information or Open Colleges’ revenue and operating results because the results of operations are not material to our consolidated results of operations.

The acquisition purchase price allocation is summarized below:



($ in thousands)
Net working capital deficit⁽¹⁾	$	(10,979	)
Property and equipment	2,684
Finite-lived intangibles	60,575
Goodwill	127,656
Deferred taxes, net⁽¹⁾	(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

⁽¹⁾ Net working capital deficit and deferred taxes, net include approximately $33 million of assumed liabilities.