EV question: Investment in associate

i have never heard of this in calculating EV so please advise...

I am 100% affirmative about that (discussed during interview at BB and even seen on this forum) I just don't know why !

From what I was explained, investments in associates is almost like a market (stock) investment. Deducting it out of EV will be done to account for the likely sale of this investment once the firm is acquired, as it is not really part of the operational enterprise. There is scenarios where the investment is something the possible acquirer may want to keep, in which case you could add it back to EV (again at market value).

Think of it like cash... when subtracting it from EV, you're implicitly classifying these investments as being highly liquid. This in turn will be used to offset the purchase price when acquiring the company (as explained by the previous poster).

thx guys

Enterprise value is supposed to calculate the value of the core business operations. That's why you take out net cash- it is not part of the business. Investments in subs/associates are just like illiquid stock investments- they are not actively part of the company's core op's.

fine - but if you are taking that out then you will have to make an adjustment to equity earnings/dividends that are coming through from the subsidiary when doing comps...

i have personally not come across anyone making an adjustment to investment in associate. the closest would be doing a SOTP valuation - where you will then value the investment in associate at market...

Finally, the fact that there is an investment in associate line (i.e. the investment in equity accounted for) should mean that the investment is core to the company's business (not "core" in the traditional sense, but in the sense that the investment is not something that intends to be traded". So actually, I don't think you should normally strip out investment in associates when calculating EV.

You are confusing investment in associates with minority interest, which is added to EV as a debt on the B/S. This would be added because as you said - sort of - you would consolidate statements, and earnings from the minority interest are added to the companies operational figures.

I have rarely come across someone who does and EV comp that doesn't strip it out, this ranged from Citi to GS to TD Securities, so I'm not sure how you haven't come across this.

what i'm saying that you only see the line investment in associates when the company equity accounts for its investments. Earnings from the sub/assoc increases the investment in associate line in the B/S, whereas cash divs reduces this. The corresponding line in the I/S would be something like equity accounted earnings or something like that.

If you were going to strip out investment in associates, then you would haveo to strip out the equity accounted income if it was including above the operating income line.

but i understand your point above - haha. We are not as nuanced where i work - but i owuld think its a rather small adjustment in most cases. i don't even see that being made in factset or bloomberg etc when calculating ev.