Calculating Enterprise Value

Using the equation,

EV = Market Value of Equity + (Total Debt + Capitalized Leases - Cash & Equiv) + Minority Interest + Preferred Equity

Can someone explain the addition of Minority Interest? And how this arises?

Also, how often does a company have Capitalized Leases? Will they be appear seperately on the BS?

 
Best Response

Capitalized leases will be a footnote in the company's financial statements. Usually, they are kind enough to even capitalize them for you in the footnote, although sometimes you have to capitalize them yourself.

There are specific rules when companies HAVE to capitalize leases. If any of the following occur, the company must capitalize their leases:

  • If PV of operating leases is >90% of the PPE's fair value.
  • If operating lease leads to transition of ownership at end of lease.
  • If lease covers entire expected lifespan.
  • There is one more I'm forgetting...you can look it up.

Edit: Also, these types of leases are VERY common, especially in the retail and manufacturing space. Some companies (Home Depot, McDonalds, Target) are very shady about this, so it's quite important to capitalize their operating leases.

I've never dealt with minority interests, so I'll let someone else answer that.

 
models_and_bottles:
Capitalized leases will be a footnote in the company's financial statements. Usually, they are kind enough to even capitalize them for you in the footnote, although sometimes you have to capitalize them yourself.

There are specific rules when companies HAVE to capitalize leases. If any of the following occur, the company must capitalize their leases:

  • If PV of operating leases is >90% of the PPE's fair value.
  • If operating lease leads to transition of ownership at end of lease.
  • If lease covers entire expected lifespan.
  • There is one more I'm forgetting...you can look it up.

The first two are correct, but these are the other two:

  • If the life of the lease exceeds 75% of the life of the asset
  • If there is an option to purchase the asset at a bargain price
 

Correct as far as I can tell

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think the enterprise value = 900 in both cases

theoretical/corp finance response -- if you repurchase 100 of shares it will not affect enterprise value - remember, enterprise value = the value of a firm independent of its capital structure

math response -- lets say share price = $10 and there are 50 shares outstanding pre-buyback

pre-buyback enterprise value = 900 = 500 equity (50 shares at $10 / share) + 500 debt - 100 cash

in the buyback, 100 cash will be used to repurchase 10 shares for $10 / share

post buy-back enterprise value = 900 = 400 equity (40 shares at $10 / share) + 500 debt

**this is assuming there is no share price reaction to the buyback, obviously..

 

The link from the poster above is very correct.. but just to add.

% minority stake are interests owned in another company. Typically, before a conglomerate acquires another target, they usually partner with the target by way of a JV, an alliance, a joint marketing or product development effort. In order to solidify this relationship, both sides usually take stakes in each other. This also helps both sides get more familiar with the operations, management, etc. of the other party.

It also serves as a signal to let their own SHs know that they are considering an outright takeover to bolster their market position. The hope is that b/w now and the transaction (if ever), the markets reward the move now with a premium.

Sponsors such as Sun Capital also do the minority stake thing, but eventually they buy out their targets if the investment is worthwhile like in the hostile takeover of Kellwood and their recently rejected bid for Furniture Brands. In both cases, they built minority positions before making full bids for their remaining stakes.

Valuing the minority stake (under 50%) is as simple as valuing the subsidiary and backing out debt from a DCF BEV to get equity value and multiplying that # by % stake, or using the latest market cap * % stake (for equity value), or even using a good EV/whatever multiple for subco, and then backing out subco debt to get the equity value of subco, and then multiplying equity value by % stake. It all depends on the information you have and the size of the stake, and the purpose of the valuation (deal pricing, financial reporting, what the client wants to do, etc).

Companies do it differently, but the recent stock price is your best bet for financial reporting especially if the stake is held for "sale" , or for "trading". If it is classified as "held till maturity", the value may not reflect latest market cap, so you may have to get latest prices.

For balance sheet purposes, depending on the size of the stake, the accounting is a little different. Stakes less than 50% are not consolidated, but are shown as financial assets on asset side of B/S.

When you have a majority stake in a subco (> 50%) there is consoildation of subco and parent as per GAAP, and there is another kind of minority interest on Liability Side - which is the % of a subsidiary not owned by the majority stake holder in the subsidiary. E.g News Corp takes a 60% stake in Yahoo!

In such cases, since the statements are actually consolidated, I prefer to separate subsidiary from the parent and value them separately to get equity value of both, if I have sufficient data.

But like the above poster said, if you are just creating a comp spread, to compare apples to apples, add in the minority interest (shown on liability side) to your numerator and divide by the consolidated sales/EBITDA to get your multiple.

 

makes sense that it would be a proxy for liabilities. If no other line items are available on the balance sheet other than customer deposits, then thats the only component of debt when calculating EV.

 

interesting question but I don't think one would normally do so. I mean supposedly there are reasons to back the why certain items are "off balance sheet" aka not considered as part of the firm's value or has no claim on the firm's assets

 
justanotherday:
interesting question but I don't think one would normally do so. I mean supposedly there are reasons to back the why certain items are "off balance sheet" aka not considered as part of the firm's value or has no claim on the firm's assets

likely the reason why. i saw it in a BB's multiple calculations (analysis of selected multinational organizations)

 

EBITDA also gets messy when you're comparing firms which either rent or buy against each other. Stating the obvious here but i'll do it anyway, if the firm rents, the cost'll be an operational cost (lower EBITDA), if the firm buys, it'll be on the income statement via D&A, and hence taken out in EBITDA (higher EBITDA).

and so, EBITDAR is common.

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