I'm currently valuing a conglomerate and am trying to approach with both a DCF and break-up (sum-of-the-parts) approach. I had a couple questions:
1) For the break-up analysis, the company also has a "Corporate" segment that is basically just overhead and debt interest payments. How do I include this in the valuation? Should I just allocate its EBITDA proportionally to the different business segments?
2) How much sense does it even make to run a DCF? I was thinking of running a DCF for the individual segments as well but I don't have enough info on each (missing individual balance sheets so no change in working capital at segment level, for example). Should I run the DCF on a consolidated basis?
For what it's worth, two of the 8 segments comprise 85% of revenues and EBITDA.
You could always allocate the balance sheet based on revenue in each segment in order to run the DCF. Are the two segments which make up 85% of rev and ebitda distinctively different? If not, just do it on a consolidated basis.
They aren't distinctively different -- one is oil-field services and one is construction cleanup and scrap metal. So both are relatively asset-heavy, cap-ex intensive businesses.
So you're saying just run the DCF on a consolidated basis under the assumption that the other businesses aren't material enough to move the needle one way or the other?
I was really hoping this thread was gonna be about chicks.
Read it again. I think he's talking about ending a relationship... possibly a marriage considering a small part of the whole accounts for 85% of EBITDA.
Well also consider aspects of the two segments which may require separate discount rates. For example, if one of the companies has contracts in place with their customers, all else being equal, a lower discount rate should be applied. Also, if one of the segments is more reliant on oil and gas prices being at a certain level, than a higher discount should apply.
If you decide not to run on a consolidated basis, you may think about using market multiples to apply to either the 6 other segments, or all 8. You can then reconcile between the DCF and market multiples for the two segments.
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