For a company with entities in multiple jurisdiction, should we calculate Beta for each of them? (CAPM)
Can anyone share how they usually calculate beta or do a valuation for a company with operations in multiple jurisdictions? Thanks!
Me and my team are trying to value a company who has operations in multiple jurisdictions (5+ in the same continent, another 2+ in another continent. All operations have same demographics, all same sector, with some more mature than others etc.
I suggested:
- calculating an individual beta for all the various entities for their each individual DCF for a "SOTP" by using more specific beta comps tailored to operations in each jurisdiction (i.e. a beta for each jurisdiction).
- Relever/lever based on group debt and not individual company debt as leverage will be for the entire company.
However, I was told that we should:
- just use a "blended" beta using comps from all the jurisdictions (i.e. 1 beta for all the entities),
- delever and relever
- apply the "blended beta" to all the entities for their relevant DCF as the Country risk is imbued into the market risk premium. i.e. beta is sector focused and does not care about geography
Just checking if anyone else finds my suggestion to be more "precise" or has thoughts or comments?
I always understood that various entities should have various betas (as evidenced by each listed entity having different betas, possibly due to leverage but due to the difference between assets move in proportion to the market)
Thanks all.
will appreciate any discussion points, thanks!
its gonna be somewhere around 10%
sorry are you referring to beta? or the cost of equity?
And if not you will adjust the 10% as the mandate requires. would not worry about this question too much really not an important one in my opinion.
Ideally you could find a beta for a multinational. I don’t think blending betas from different jurisdictions makes any sense because beta is just a correlation. An EM beta of 1 is very different than a US beta of 1 given each market has a different volatility baseline. You need to add a country risk premium (I believe it’s calculated as EM Gov Debt Volatility / US Gov Debt Volatility, but you can just google it).
I was told that the "beta" is just a measure of the general sector return vs market return (as they took the betas from countries around the world), and the country risk is imbued into the Equity Risk Premium for the various entitles. I guess ultimately it will matter where the "beta" is taken from and how it is calculated (i.e. are all company's beta calculated based on S&
the countries are a bit "bespoke" so not sure if multinational works but yes i did suggest this as well (i.e. to blend beta for various companies in various countries and blending by weighted average to their net income/revenue etc.), thank you for the suggestion
Beta is the correlation of a security versus the market. Not an industry. If you are blending the betas, you will be only applying it to one ERP (Blended Beta * ERP), so you will fail to account for the country risk premium. Beta is problematic for emerging markets because it doesn't adjust for country risk premium.
Say a company is 50% US and 50% EM and the relevant betas for both markets are 1. With your logic, the blended beta is also one. If I apply this blended beta to CAPM formula, I will have Rf + (1 * ERP). This is clearly not the cost of equity because it ignores the fact that half the company is in a far riskier country. I think it would make more sense to use a domestic beta only and then adjust the company's equity risk premium to reflect its exposure to riskier markets.
Thanks for the reply.
Agreed on your first sentence, beta for an asset is a correlation of a security vs the market and not the industry. But wouldn't it be possible to find industry beta? To find the "industry beta" we got some global comps and delevered/relevered it to find an "industry beta" i.e mean/median
Link to a bunch of industry betas: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/Betas.html
One of the reasons people argue against CRP is because it's "diversifiable risk", especially when we're pitching it to some financial sponsors. Happy to get comments on this, I feel the team didn't include it because cost of equity will be too high if we included CRP into the following formulae Re=Rf+β(Rm−Rf+CRP) and there will be too high a valuation drop. Either how, I would have applied the country risk premium to the various entities.
Reasoning given by investopedia for possibly not including CRP: https://www.investopedia.com/terms/c/country-risk-premium.asp)
For ERP + CRP estimations, we used this: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.ht…
Apologies but you mentioned that both betas are 1, which i do not believe as I think EMs and US would have different betas. I mentioned in my OP that they are all similar demographics (lets assume all EM), and some are more mature in operations than others.
We plan to apply the "industry beta" to the various entities (and assumed CRP is built into the ERP) to get all individual valuations for the 6 entities and then do a "SOTP".
So yes, the beta is the same across all entities as it's considered a "global industry beta" and it seems that we should be letting the ERP/CRP take care of the "country adjustment" instead of beta. I myself am not too sure about this and happy to get comments from everyone as i also feel that beta might need to be "sensitised" to the markets the entities are operating in but can't seem to find a solid line of reasoning other than a gut feel.
Do you think you'll be "double counting" the difference in risk from the Country risk? i.e. accounting for country risk through beta and then through ERP?
Thanks again for the comment.
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