Financial reporting set for shake-up as new revenue recognition standard looms

BY Fraser Tennant

Major developments likely to affect a company’s accounting and financial reporting – among them the imminent International Financial Reporting Standards (IFRS) revenue recognition standard – are the focus of a new report by KPMG.

In its ‘Quarterly Outlook December 2017’, KPMG advises companies to prioritise the implementation of the new standard and ensure their audit committees and external auditors are engaged when making their significant accounting judgments before the standard becomes effective on 1 January 2018.

The aim of the revenue recognition standard is to improve comparability by implementing a single revenue recognition model across industries and across the globe. Moreover, the new standard eliminates industry-specific accounting for revenue under US Generally Accepted Accounting Principles (GAAP) and introduces a principles-based approach that more closely aligns with IFR standards.

Originally set to be introduced two years ago, the Financial Accounting Standards Board (FASB) took the decision to defer the date of adoption in order to give companies more time to complete their implementation activities.

“Less than two weeks remain before the revenue recognition standard is effective for public companies with calendar year-ends,” states the report. “Companies need to prioritise their revenue implementation efforts before the adoption date.”

While the importance of the standard is beyond question and companies need to focus on dedicating their attention and resources to its implementation, KPMG is keen to stress that companies should not lose sight of the importance of other standards that are also due to become effective in 2018.

These additional standards include the recognition and measurement guidance for financial instruments, and the leases standard which becomes effective in 2019. With these standards also intended to clarify or simplify accounting requirements, the KPMG report suggests that companies should begin their implementation efforts now to increase implementation quality.

That said, it has been reported that many companies have been slow to prepare for the new standard. Indeed, recent analysis by Deloitte of a sample of Fortune 1000 companies found only a small number were “substantially complete” with their implementation activities.

“We found that really only 15 percent of the companies that we analysed in our sample population indicated in their disclosures that they were substantially complete,” said Eric Knachel, a senior consultation partner at Deloitte. “If only 15 percent say they are substantially complete, obviously that means that 85 percent are not.”

Report: Quarterly Outlook December 2017

New era for retail as $25bn deal sees Unibail-Rodamco acquire Westfield

BY Fraser Tennant

In a deal that kicks off a new era for retail, French property group Unibail-Rodamco SE is to acquire Australia’s Westfield Corporation, owner of Westfield Shopping Centres, in a deal valued at $24.7bn.

Under the terms of the agreement, Westfield securityholders will receive a combination of cash and shares in Unibail-Rodamco, valuing each Westfield security at $7.55. The proposed transaction has been unanimously recommended by Westfield’s board of directors and Unibail-Rodamco’s supervisory board.

Westfield group owns and operates 35 shopping centres in the US and UK, encompassing approximately 6400 retail outlets and total assets under management of $32bn.

“The acquisition of Westfield is a natural extension of Unibail-Rodamco’s strategy of concentration, differentiation and innovation,” said Christophe Cuvillier, chairman of the management board and chief executive of Unibail-Rodamco. “It adds a number of new attractive retail markets in London and the wealthiest catchment areas in the US. It provides a unique platform of superior quality shopping destinations supported by experienced professionals of both Unibail-Rodamco and Westfield. We look forward to welcoming Westfield’s securityholders as shareholders in the new Group and continuing to create significant value for our existing and new shareholders.”

Following the completion of the transaction, Christophe Cuvillier will be the group chief executive and Colin Dyer will be group chairman of the supervisory board. Furthermore, a newly created advisory board, to be chaired by Sir Frank Lowy, will provide independent advice from outside experts on strategy.

“This transaction is the culmination of the strategic journey Westfield has been on since its 2014 restructure,” said Sir Frank Lowy, chairman of the Westfield board of directors. “We see this transaction as highly compelling for Westfield’s securityholders and Unibail-Rodamco’s shareholders alike. Unibail-Rodamco’s track record makes it the natural home for the legacy of Westfield’s brand and business. We look forward to seeing Westfield continue to grow as part of the world’s premier owner of flagship shopping destinations.”

The transaction is conditional upon the satisfaction of customary conditions, including Australian court approval and the approval of Unibail-Rodamco shareholders and Westfield securityholders, and is expected to close in the first half of 2018.

Mr Cuvillier concluded: “We believe that this transaction represents a compelling opportunity for both companies to realise benefits not available to each company on a standalone basis, and creates a strong and attractive platform for future growth.”

News: Westfield shopping centres bought in $25bn deal

LKQ seals Stahlgruber deal

BY Richard Summerfield

American auto parts company LKQ Corporation is to acquire Stahlgruber GmbH from Stahlgruber Otto Gruber AG in a $1.77bn deal, the companies have announced in a statement.

Chicago-based LKQ will fund the deal from planned debt offerings, borrowings under its current credit facility and direct issuance of 8.06 million newly issued LKQ shares to Stahlgruber's owner. The deal is expected to close in the second quarter of 2018.

The acquisition will greatly improve LKQ’s standing in Europe where Stahlgruber is a leading wholesale distributor of aftermarket spare parts for passenger cars, tools, capital equipment and accessories. LKQ will also gain access to Stahlgruber’s extensive sales and manufacturing infrastructure within Europe. Stahlgruber’s facilities include 228 sales centres, six warehouses and an approximately 128,000 square metre advanced logistics centre. The deal is the latest in a string of acquisitions made by LKQ; in 2015, it completed a $1.14bn deal for Rhiag-Inter Auto Parts Italia S.p.A.

“This transformative acquisition solidifies LKQ as a leading Pan-European aftermarket mechanical parts distributor, and further enhances our global diversification strategy,” said Dominick Zarcone, president and chief executive of LKQ. “Stahlgruber has a history of delivering above-market growth and its stellar industry reputation is an ideal fit with our culture; we are extremely proud to welcome the approximately 6600 Stahlgruber employees to the LKQ family. Importantly, we believe that our combined efforts will create tremendous long-term value for our customers and stockholders and growth opportunities for our collective team members.”

John S. Quinn, chief executive and managing director of LKQ Europe, said: “Stahlgruber will create a contiguous footprint and serve as an additional strategic hub for our European operations, allowing for continued improvement in procurement, logistics and infrastructure optimisation. The LKQ Europe management team and I look forward to working with Stahlgruber’s management team and leveraging our combined best practices to maximise the benefits of scale across the continent.”

Heinz Reiner Reiff, chief executive of Stahlgruber, said: “This combination is a natural fit for both LKQ and Stahlgruber. I am very excited about the meaningful benefits that will occur by combining our complementary cultures and industry leading management, which together position Stahlgruber to achieve the continued growth of its European businesses. Our acceptance of LKQ shares as part of the consideration emphasises our belief in the value of this combination.”

The automotive parts sector has seen considerable activity recently, which may have spurred LKQ into action. In September, the firm’s largest rival, Genuine Parts, entered a definitive agreement to acquire the Alliance Automotive Group for $2bn.

News: LKQ to buy German car parts retailer Stahlgruber in $1.8 billion deal

Dealmaking deluge due – Deloitte

BY Richard Summerfield

Domestic mergers and acquisitions (M&A) activity in the US is expected to pick up in 2018, following a fairly subdued 2017, according to a new report from Deloitte.

Deal activity in 2017 has been largely stymied by economic, political and regulatory uncertainty, as well as market volatility, and unrealistic valuations. However, according to respondents to Deloitte’s fifth M&A trends survey, many of these fears will begin to diminish moving forward, resulting in increased dealmaking activity and increased deal values.

Both in the number of deals and the size of transactions, Deloitte expects 2018 to be a bumper year for M&A. Of the 1000 US corporate dealmakers and private equity firms surveyed for ‘The State of the Deal: M&A Trends 2018’ report, around 68 percent of corporate executives and 76 percent of private equity leaders expect to see an increase in deal volume over the next 12 months. Additionally, most respondents believe deal size will either increase or stay the same in 2018, compared with deals brokered in 2017.

Technology-based dealmaking was recognised as the biggest potential driver of corporate M&A transactions, rising from 6 percent in the spring 2016 survey to 20 percent in this survey.

"There are strong signals that corporations and private equity firms are targeting bigger deals and anticipating brisker activity in 2018," said Russell Thomson, managing partner of Deloitte's US M&A services practice. "The appetite for technologies like machine learning, robotics, artificial intelligence and advanced analytics is large and growing. We're seeing some organisations buy smaller tech companies to enable strategic growth and others — typically companies well outside of the tech sector — actively looking to converge their businesses with tech companies to achieve marked transformation."

Away from the tech space, expanding customer bases in existing markets, and expanding and diversifying products and services, are set to be leading drivers of M&A deals. Among other positive factors, the Deloitte report notes that cash reserves are up significantly for potential acquirers, and that the primary intended use of that cash is for acquisitions.

Divestitures should also be a major focus in 2018. Seventy percent of survey respondents noted that their company plans to divest businesses next year. This rush of unit shedding will be driven by financing needs and strategy shifts.

Report: The state of the deal: M&A trends 2018

Toys R Us to close 26 UK stores putting 800 jobs at risk

BY Fraser Tennant

In another blow for the beleaguered toy retailer giant, Toys R Us has announced that it is to close 26 stores in the UK as part of a process to transform the business and make it fit to meet the evolving needs of customers in today’s UK retail market.

Under the UK Company Voluntary Arrangement (CVA) process, the toy chain has submitted a comprehensive operational and financial restructuring plan to its creditors and will solicit their approval of this plan over the coming weeks. 

If approved, the CVA would substantially reduce the UK company’s rental obligations and allow the company to move to a new, viable business model. The store closures, which may put more than 800 jobs at risk, are expected to commence in Spring 2018.

The toy retailer giant currently employs 3200 people in the UK.

The CVA process will not impact any Toys R Us entities or stakeholders outside the UK, including employees, vendors and customers. The company's approximately 1600 stores around the world, including all stores in the UK, are currently open for business and continuing to operate as usual.

“All of our stores across the UK remain open for business as normal through Christmas and well into the New Year,” said Steve Knights, managing director of Toys R Us UK. “Customers can also continue to shop online and there will be no changes to our returns policies or gift cards across this period.”

During 2018, the plan is for Toys R Us to make changes to the store estate as it moves to a new business model for future growth and profitability.

Mr Knights continued: “Our newer, smaller, more interactive stores are in the right shopping locations and are trading well, while our new website has generated significant growth in online and click-and-collect sales. But the warehouse style stores we opened in the 1980s and 1990s, while successful in the early days, are too big and expensive to run in the current retail environment.”

As a result of a heavy debt load and a consumer switch toward online shopping, in September 2017, Toys R Us voluntarily filed for Chapter 11 bankruptcy protection in the US and Canada.

Dave Brandon, chairman and chief executive of Toys R Us, concluded: “As we continued to work through the financial restructuring process, we hope to receive authorisation to restructure our UK lease obligations so that we will be better able to invest in our UK business.”

News: Toys R Us to shut 'at least' 26 UK stores

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