3. Acquisitions and Dispositions

Acquisitions

CPO Commerce, Inc.

On May 30, 2014, Essendant Co. completed the acquisition of CPO Commerce, Inc. (“CPO”), a leading online retailer of brand name power tools and equipment. The acquisition of CPO significantly expanded the Company’s digital resources and capabilities to support resellers as they transition to an increasingly online environment. CPO’s expertise will strengthen Essendant’s ability to offer features like improved product content, real-time access to inventory and pricing, digital marketing and merchandising, and an enhanced digital platform to our resellers and manufacturing partners.

The purchase price was $37.8 million, including $5.5 million related to the estimated fair value of contingent consideration. The contingent consideration ultimately paid will be determined based on CPO’s sales during a three-year period immediately following the acquisition date. The final payments related to the contingent consideration will be determined by actual achievement in the earn-out periods and will be between zero and $10 million. The Company financed the 100% stock acquisition with borrowings under the Company’s available committed bank facilities. Purchase accounting for this transaction was completed as of May 30, 2015.

MEDCO

On October 31, 2014, Essendant Co. completed the acquisition of 100% of the capital stock of Liberty Bell Equipment Corp., a United States wholesaler of automotive aftermarket tools and equipment, and its affiliates (collectively, MEDCO) including G2S Equipement de Fabrication et d’Entretien, a Canadian wholesaler. MEDCO advances a key pillar of the Company’s strategy, which is to diversify into channels and categories that leverage our common platform. It also brings expanded categories and services to customers.

The purchase price was $150.4 million, including $4.7 million related to the estimated fair value of contingent consideration. The contingent consideration ultimately paid will be determined based on MEDCO’s sales and EBITDA during a three-year period immediately following the acquisition date. Additionally, $6.0 million was reserved as a payable upon completion of an eighteen month indemnification period. The final payments related to the contingent consideration will be determined by actual achievement in the earn-out periods and will be between zero and $10 million. Any changes to the estimated fair value of contingent consideration after the original purchase accounting is completed will be recorded in “warehousing, marketing and administrative expenses” in the period in which a change occurs. This acquisition was funded through a combination of cash on hand and cash available under the Company’s committed bank facilities.

Nestor Sales LLC

On July 31, 2015, Essendant Co. completed the acquisition of 100% of the capital stock of Nestor Sales LLC (“Nestor”), a leading wholesaler and distributor of tools, equipment and supplies to the transportation industry. This acquisition accelerates the Company’s growth in the automotive aftermarket, complements the Company’s existing industrial offerings while providing access to new customer segments, and advances a key strategic pillar to diversify into channels and categories that leverage our common platform.

The purchase price was $41.8 million. This acquisition was funded through a combination of cash on hand and cash available under the Company’s revolving credit facility.

The Company has developed preliminary estimates of the fair values of assets acquired and liabilities assumed from the MEDCO and Nestor acquisitions for purposes of allocating the purchase prices. The estimates are subject to change as the valuation activities are completed. The fair values of the assets and liabilities acquired in the MEDCO and Nestor acquisitions were estimated using various valuation methods including estimated selling prices, market approach, and discounted cash flows using both an income and cost approach. The same methods were used for determining the fair values of the assets and liabilities acquired for the CPO acquisition.

Any changes to the preliminary allocations of the purchase prices, some of which may be material, will be allocated to residual goodwill.

At September 30, 2015, the allocations of the purchase prices were as follows (amounts in thousands):

	CPO			MEDCO			Nestor
	(Final)			(Preliminary)			(Preliminary)
Purchase price, net of cash acquired	$	32,225		$	145,873		$	39,939

Accounts receivable		(2,956	)		(44,815	)		(9,230	)
Inventories		(13,051	)		(55,491	)		(10,442	)
Other current assets		(269	)		(1,299	)		(339	)
Property, plant and equipment, net		(488	)		(4,408	)		(1,251	)
Other assets		-			(650	)		(752	)
Intangible assets		(12,800	)		(40,000	)		(17,670	)
Total assets acquired		(29,564	)		(146,663	)		(39,684	)

Accounts payable		16,911			32,383			4,992
Accrued liabilities		2,580			5,542			1,912
Deferred income taxes		3,453			2,716			3,875
Other long-term liabilities		90			52			76
Total liabilities assumed		23,034			40,693			10,855
Goodwill	$	25,695		$	39,903		$	11,110

The purchased identifiable intangible assets were as follows (amounts in thousands):

	CPO (Final)			MEDCO (Preliminary)			Nestor (Preliminary)
	Total		Estimated Life	Total		Estimated Life	Total		Estimated Life
Customer relationships	$	5,200	3 years	$	37,590	3-15 years	$	16,890	13 years
Trademark		7,600	15 years		2,410	1.5-15 years		780	2.5-15 years
Total	$	12,800		$	40,000		$	17,670

Disposition of Azerty de Mexico

On September 18, 2015, the Company completed the 100% stock-sale of its subsidiary, Azerty de Mexico, to the local general manager. The sale price was a combination of cash and a seller’s note, totaling $8.7 million. The seller’s note matures in 180 days and requires periodic repayments. When the decision to sell the subsidiary was approved, in accordance with Accounting Standards Codification (ASC) 360-10-45-9 Property, Plant, and Equipment, Azerty de Mexico met all of the criteria to be classified as a held-for-sale asset disposal group. In accordance with ASC 350-20-40, Intangibles – Goodwill and Other, the Company allocated a proportionate share of the goodwill balance from the office product and janitorial and breakroom supply reporting unit based on the subsidiary’s relative fair value to the reporting unit and performed an impairment test for the allocated goodwill utilizing the cost approach to value the subsidiary. Based upon the impairment test, the $3.3 million of goodwill allocated to the subsidiary was determined to be fully impaired. Additionally, in conjunction with classifying the subsidiary as a held-for-sale asset disposal group, the Company revalued the subsidiary to fair value using the cost-approach method less the estimated cost to sell. The carrying value of the disposal group, including a $10.1 million cumulative foreign currency translation adjustment, was then compared to the fair value less the estimated cost to sell, resulting in a pre-tax impairment loss of $10.1 million. The goodwill impairment of $3.3 million, the held-for-sale impairment of $10.1 million and the $0.1 million estimated cost to sell were recorded in the first quarter of 2015 within “warehousing, marketing and administrative expenses.” During the second and third quarters, the Company recorded an additional $1.4 million and $2.1 million, respectively, within “warehousing, marketing and administrative expenses.” This includes a $1.5 million loss on sale. The pre-tax loss, excluding the foreign currency translation adjustment noted above, attributable to Azerty de Mexico for the three months ended September 30, 2015 and 2014 was $0.9 million and $0.2 million, respectively. The pre-tax loss attributable to this subsidiary for the nine months ended September 30, 2015 was $5.2 million and none for the nine months ended September 30, 2014.