Business Combination (Notes)

9 Months Ended

Sep. 30, 2013

Business Combinations [Abstract]

Business Combination Disclosure [Text Block]

BUSINESS COMBINATIONS

Acquisition of ecoATM, Inc.,

On July 1, 2013, Outerwall Inc., entered into an agreement and plan of merger with ecoATM, Inc., a Delaware corporation (“ecoATM”) that provides an automated self-service kiosk system to purchase used mobile phones, tablets and MP3 players for cash. On July 23, 2013 all necessary approvals were obtained and we completed the acquisition of the remaining 77% equity interest which we did not already own. The primary reason for the business combination was to expand Outerwall’s presence in automated retail and gain exposure to the growing demand for refurbished products and mobile devices. We believe that we are uniquely well positioned to help scale the ecoATM footprint.

We accounted for the purchase of ecoATM as a business combination. Costs related to this acquisition of approximately $5.7 million were expensed during the second and third quarters 2013 and are included within general and administrative expenses in our Consolidated Statements of Comprehensive Income.

The following table highlights the consideration transferred, the fair value of our previously held equity interest and the fair value of replacement awards issued attributable to post-combination services.

Dollars in thousands	July 23, 2013
Consideration Transferred:
Cash paid	$	262,882
Replacement awards attributable to pre-combination services	1,398
Total consideration transferred	264,280
Previously held equity interest:
Acquisition date fair value of previously held equity interest	76,359
Total consideration transferred and fair value of previously held equity interest	$	340,639
Fair value of replacement awards attributable to post-combination services	$	30,671

As a part of the merger, we issued replacement awards for unvested restricted stock and options in ecoATM with rights to receive cash equal to the per share merger consideration for restricted stock and net of the exercise price for options. The replacement awards vest in accordance with the terms of the original replaced award. The fair value of the original and replacement awards amounted to $32.1 million, $1.4 million of which was attributed to pre-combination services rendered and included in the calculation of total consideration transferred. The replacement awards are considered liability classified as they require settlement in cash. Expense associated with the post-combination awards will be recognized net of forfeitures, and cash payments will be made, in accordance with the awards' vesting schedule, generally on a monthly basis.

Prior to the merger, we had a 23% equity interest in ecoATM. The guidance on accounting for business combinations requires that an acquirer remeasure its previously held equity interest in the acquiree at its acquisition date fair value and recognize the resulting gain or loss in earnings. We valued our previously held equity interest in ecoATM at $76.4 million, which was based on the per share merger consideration, resulting in a gain of $68.4 million included within income (loss) from equity method investments in our Consolidated Statements of Comprehensive Income and within (Income) loss from equity method investments, net in our Consolidated Statements of Cash Flows.

The following table shows the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed and the resultant purchase price allocation.

Dollars in thousands	July 23, 2013
Assets acquired:
Cash and cash equivalents	$	18,846
Accounts receivable	18
Prepaid expenses and other current assets	4,450
Current deferred income taxes	6,476
Property and equipment	23,207
Intangible assets	41,400
Goodwill	264,213
Other long-term assets	131
Total assets acquired	358,741
Liabilities assumed:
Accounts payable	(3,755		)
Other accrued liabilities	(1,605		)
Long term deferred tax liabilities	(12,742		)
Total consideration transferred and fair value of previously held equity interest	$	340,639

The assets acquired and liabilities assumed, as well as the results of operations from the date of the acquisition, are included within our New Ventures segment with the exception of expense for rights to receive cash which are unallocated corporate expenses. Goodwill of $264.2 million is calculated as the excess of the purchase price paid over the net assets acquired. The goodwill recorded as part of the ecoATM acquisition primarily reflects the expected market opportunity from the expansion of the ecoATM footprint in the growing U.S. mobile device market providing consumers with a convenient trade-in solution, as well as any intangible assets that do not qualify for separate recognition. All of the goodwill has been assigned to our New Ventures segment. None of the goodwill is deductible for tax purposes.

Acquired identifiable intangible assets and their estimated useful life in years are as follows:

Dollars in thousands	Purchase Price		Estimated Useful Life in Years
Intangible assets:
Developed technology	$	34,000	5
Trade name	6,000		5
Covenants not to compete	1,400		5
Total	$	41,400

The following table shows the revenue and operating loss included in our Consolidated Statements of Comprehensive Income resulting from the acquisition of ecoATM since the closing date, including the amortization for acquired intangibles which are allocated to our New Ventures segment and expense for rights to receive cash which are unallocated corporate expenses:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
Dollars in thousands	2013		2013
Revenue	$	15,226	$	15,226
Operating loss	$	3,236	$	3,236

Pro forma information

The following unaudited pro forma information represents the results of operations for Outerwall Inc. and includes the ecoATM business acquired as if the acquisition was consummated as of January 1, 2012.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Dollars in thousands	2013		2012		2013		2012
Revenue	$	590,819	$	540,341	$	1,739,863	$	1,643,807
Net income (1)	$	17,041	$	29,632	$	73,432	$	176,843

(1) Net income includes the acquisition costs of $1.7 million and $4.0 million recorded in the first and second quarters of 2013, respectively.

The unaudited pro forma results have been adjusted with respect to certain aspects of our acquisition of ecoATM to reflect:

• changes in assets and liabilities to record their acquisition date fair values and the resulting changes in certain expenses such as amortization;

• recognition of the gain on our previously held equity interest as if the acquisition occurred on January 1, 2012;

• recognition of expense associated with the post-combination rights to receive cash as if they were granted on January 1, 2012;

• reversals of losses from our equity investment; and

• the inclusion of the results of operations and the impact on taxes as if ecoATM had been a wholly owned subsidiary since January 1, 2012.

The unaudited pro forma results do not reflect future events that may occur after the acquisition, including, but not limited to, the anticipated realization of ongoing savings from operating synergies in subsequent periods.

Acquisition of NCR Corporation

On June 22, 2012, Redbox acquired certain assets of NCR Corporation (“NCR”) related to NCR’s self-service entertainment DVD kiosk business (the “NCR Asset Acquisition”). The purchased assets include, among others, self-service DVD kiosks, content library, intellectual property, and certain related contracts, including with certain retailers. In consideration, Redbox paid NCR $100.0 million in cash and assumed certain liabilities of NCR related to the purchased assets. The operating results of NCR’s self-service entertainment DVD kiosk business are included in our Redbox segment results.

We accounted for the NCR Asset Acquisition as a business combination. In accordance with US GAAP, the measurement period for our purchase price allocation ends as soon as information regarding our assessment of the quality and quantity of the kiosks acquired as well as certain facts and circumstances becomes available; such measurement period will not exceed twelve months from the acquisition date. During the second quarter of 2013, we obtained sufficient evidence regarding the quality and market value of the kiosks acquired (See Note 6: Property and Equipment for more information on the sale of certain NCR kiosks during the second quarter of 2013) to finalize our purchase price allocation. As a result, we retroactively adjusted our purchase price allocation to increase the value assigned to the kiosks acquired by $14.8 million with a corresponding decrease to goodwill to the period in which the NCR Asset Acquisition occurred. This adjustment to our purchase price allocation resulted in an immaterial difference in depreciation which we recorded as a cumulative adjustment in the second quarter of 2013.

The following table shows our preliminary purchase price allocation, adjustments we made during the six months ended June 30, 2013 and our final purchase price allocation based on the fair value of the assets acquired and liabilities assumed at the NCR Asset Acquisition date as follows:

	June 22, 2012
Dollars in thousands	Preliminary			Adjustments			Final
Assets acquired:
Content library	$	4,330		$	—		$	4,330
Prepaid expenses	240			—			240
Deferred income taxes	1,500			—			1,500
Property and equipment	9,130			14,766			23,896
Intangible assets	46,960			—			46,960
Goodwill	42,110			(14,766		)	27,344
Total assets acquired	104,270			—			104,270
Liabilities assumed:
Accrued liabilities	(4,270		)	—			(4,270		)
Total consideration paid in cash	$	100,000		$	—		$	100,000

Goodwill of $27.3 million, attributable primarily to the future expected synergies and operational efficiencies, as well as market expansion, has been assigned to our Redbox segment. The majority of the goodwill is deductible for tax purposes.

We estimated the fair value of the acquired identifiable intangible assets based on the forecasted future cash flows discounted at a rate of approximately 11%. A portion of the purchase price is allocated to the following identifiable intangible assets:

Dollars in thousands	Purchase Price		Estimated Useful Life in Years
Intangible assets:
Retailer relationships	$	40,000	10
Patents	6,300		8
Trademark and trade name	500		1
Internal use software	160		1
Total	$	46,960

As of the date of acquisition, we estimated the weighted-average useful life of the acquired identifiable intangible assets to be 9.6 years.