How do you actually value Minority Interests?
Hi guys,
so when having derived an EV through e.g. mulitples or a DCF, if we want to get to EqV, we eventually have to substract Minority Interests. But as far as I am informed, they could be like decades old and their book value is what the parent company paid for it's controlling interests back then, plus the portion of Net Income that belongs to MI.
But in an M&A process, we want a fairly exact number of EqV and so we have to value MI, don't we? How do we do that?
The only approach I could think of is doing a valuation of the subsidiary company, getting the EV, getting from EV to EqV by substracting Net Debt and other stuff, and then we have the Market Cap of the subsidiary and take the percentage of MI times this Market Cap to get a value of MI.
But this seems VERY VERY VERY arduous.
Is there another way or am I entirely wrong? Could you elaborate?
Best regards,
WVRHVMMER
Push, sorry guys but interviews coming up!
Not sure I understand what you're asking. If you're looking at a company (company A) and there's minority interest in the balance sheet, it's because that company is partially owned by another (company b). What you're describing seems to indicate that you need a valuation of company b, but you don't. You just need the value of the proportion of company A owned by company B. That's essentially the implied number of incremental shares outstanding attributed to company b's ownership of company A multiplied by the implied or existing share price. That will get you market equity value of the minority interest.
^ This is not correct. OP has it right. When a parent co (Company A) owns more than 50% but less than 100% of a subsidiary (Company B), the parent co will report its financials (i.e. income and assets) on a consolidated basis. Minority interest on the balance sheet represents the equity in the subsidiary (Company B) not owned by the parent (Company A).
To answer OPs question, the approach described above seems reasonable and not overly arduous. The value of the minority interest relative to the value of the parent co will influence how much focus, time and attention minority interest receives. As with all things in M&A, the value of the subsidiary (and thus the value of the minority interest) are subject to negotiation.
Thanks for bumping this because later that day I realized what I posted was tripe and looked for the post and it was gone. I'm going to blame lack of sleep but that's a pretty poor excuse.
Think you can still employ a market-based approach to valuation though. If company A is trading at an EV of 10x on $100mm of fully consolidated EBITDA, and the EBITDA of the sub represented $10mm of that, you'd have an approximation of the market value of the company by applying the proportionate EBITDA x the multiple. Of course there could be other factors like size premiums; if it wasn't the same kind of business (a vertical rather than horizontal acquisition), the company would typically be valued on a SOTP by brokers anyway, so you could apply the peer set multiple to that. Think the hard part is getting to equity value of the sub by subtracting net debt - you'd have to identify various tranches of debt which are attributable to only the sub. Might have to go through indentures / loan agreements for that.
A bit late but thanks for the great reply! The multiple approach seems pretty neat. Regarding the Net Debt issue: May it be possible to calculate an EqV of the Subsidiary by comparing the Net Income including MI with the hypothetical Net Income without MI? You would account for the tax shield and than you could use a peer group for P/E multiples and apply them on the small portion of net income that is only attributable to MI.
Not a bad idea but it really depends what industry the MI is in. So as you know, the farther 'down' you go on the IS, the more stable and mature the company has to be. If you're going all the way to P/E, there are very specific industries that are still valued on P/E for banking purposes (ie, lower growth and stable). We already discussed size premiums being a potential concern with the EBITDA-based multiples approach but this goes doubly-so for P/E because it's assuming that you have both the cost and quantum of debt in line with a large publicly traded company.
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