VIII. Goodwill

At 31 December 2008 goodwill amounted to €2,001,484k, compared with €1,294,082k in the previous year. The increase of €707,402k is due mainly to the recognition of goodwill on the acquisition of 49.95% of Aldeasa and 100% of WDFE. As mentioned in the "Business combinations" section, the amount at 31 December 2007 was adjusted to reflect the definitive fair-value measurement of the assets and liabilities of Alpha Group, consolidated from 1 June 2007.

Although the allocation of the purchase price for acquisitions made in 2008 is essentially complete, IFRS 3 allows the recognition, within 12 month of the acquisition date, of any further items that should emerge as applicable at the time of the acquisition.
At constant exchange rates, the increase in this item would have been €843,078k.
In 2008, considering the extent of acquisitions during the year, the Group began to integrate and reorganise its operations in a process that will be completed in the coming years. The identification of cash generating units (CGUs) takes account of that process and has entailed the re-allocation of goodwill recognised in prior years to the new
CGUs. Goodwill was allocated on the basis of business segments, and in some cases further split by geographical region, consistently with the minimum level at which goodwill is monitored for internal management purposes.

Details of goodwill allocation are provided in the table below:

Goodwill

The recoverability of the goodwill allocated to each CGU is tested by estimating their value in use, defined as the present value of estimated future cash flows discounted at a rate reflecting the time value of money (differentiated by currency area) and specific risks of the individual CGUs as at the measurement date. The discount rate was set in
consideration of the capital assets pricing model, which is based, as far as possible, on indicators and variables that can be observed from the market.

Future cash flows have been estimated on the basis of the 2009 budget and forecasts for 2010-2013. Cash flows beyond 2013 have been projected by extrapolating information from those forecasts and applying nominal growth rates ("g"), in keeping with the assumptions used to determine discount rates, which do not exceed the long-term
growth estimates of each CGU's sector and country of operation.

Below are the main assumptions used with respect to discount rates for future cash flows and nominal growth rates:

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To estimate cash flows for the period 2009-2013, management made a number of assumptions, including an estimate of air and road traffic volumes and thus of the future growth of sales, operating costs, investments, and changes in working capital.
The principal assumptions used to estimate cash flows can be broken down by business segment:

  • Food & Beverage Italy:

it was assumed that motorway traffic would continue to decline in 2009, following an initial downturn in September 2008. In the following years it is expected to grow by an average of 3.5% per year. The renewal rate of existing contracts was estimated on the basis of the Group's historical trends. The total incidence of operating costs is assumed to rise slightly as from 2009 and then remain essentially stable.

  • Food & Beverage HMSHost:

projections for 2009 assume a decline in consumption and traffic. Airport passenger traffic is then expected to recover (CAGR 2010-2013: 6.8%), along with sales. Management estimated the renewal rate of existing contracts on the basis of the Group's historical trends. The total incidence of operating costs is expected to be in line with previous years.

  • Food & Beverage Other:

projections for 2009 assume that traffic will continue to decline as it did towards the end of 2008. The total incidence of operating costs is expected to be in line with previous years.
For all CGUs, growth investments are correlated with the expiration of contracts, while maintenance investments are assumed to be consistent with historical trends.

  • Travel Retail & Duty-Free:
    -
    Europe: traffic assumptions were formed by observing trends in the United Kingdom and Spain. Specifically, the decrease in airport traffic that began in the second half of 2008 is expected to continue in 2009. In the following years, however, a recovery is projected to bring average annual traffic growth to around 3.5% for the period 2009-2013. Contract renewals are assumed to be in line with the Group's historical trends. Operating cost projections incorporate the synergies likely to arise from the integration of the three companies acquired in the last two years. The other cost items are expected to continue existing trends, with some variations in the years when important contracts expire.
    - North America: traffic is expected to grow by an average of 3% per year through 2013, and to suffer less of a decline than in Europe in 2009. Projections assume that the profitability of units in the start-up phase (concentrated in North America) will gradually settle in coming years, while the incidence of operating costs
    for the other units will be essentially stable.
    - Rest of the world: average annual revenue growth is assumed to be 8%, with the incidence of operating costs remaining stable.

For the entire segment, growth investments are correlated with contract renewals, while maintenance investments are assumed to be consistent with historical trends.

  • In-Flight:
    - revenue growth is projected at 2-6% depending on the location of each production unit, with higher rates prevailing in Australia and the Middle East. Operating costs should be stable as a percentage of sales, save for a reduction in overheads due to the reorganisation begun in 2008. Average annual investments are assumed to be in line with historical trends.

On the basis of these assumptions, the amount of goodwill attributed to each CGU was found to be fully recoverable.
Also, with respect to the integration process of the companies acquired in 2008, the goodwill recognised upon acquisition was tested separately for Aldeasa and WDFE, with a positive outcome.
For each CGU, recoverability of the carrying values was tested for sensitivity to changes in the main assumptions used to calculate terminal value and the discount rate for projected cash flows. The sensitivity analysis showed full recoverability up to the levels specified below:

  • Food & Beverage:
    - Italy: significantly high discount rate, with a nominal growth rate of zero;
    - HMSHost: discount rate >13%, with a nominal growth rate of zero;
    - Other: for Switzerland, France, the Netherlands, Spain and United Kingdom, an increase in discount rates of more than 100 bp, with a nominal growth rate of 0.0 to 1.0%; for Belgium, an increase in the discount rate of more than 50 bp, or a reduction in the nominal growth rate of more than 1 point.
  • Travel Retail & Duty-Free:
    - Europe: an increase in the discount rate of more than 145 bp or a negative nominal growth rate;
    - North America: an increase in the discount rate of more than 360 bp or a negative nominal growth rate;
    - Rest of the world: an increase in the discount rate of more than 325 bp or a negative nominal growth rate.
  • In-Flight:
    an increase in the discount rate of more than 210 bp or a negative nominal growth rate.

As mentioned above, the recoverable amount of the CGUs and the goodwill assigned to them is determined using estimates and assumptions that in part can be controlled and defined on the basis of experience, and in part concern future events and scenarios that are beyond Autogrill's control. Given the uncertainties of today's market, there are
many factors affecting the Group's performance that could require the recalculation of goodwill if they fail to meet our assumptions.