Net Debt, unconsolidated subsidiaries
Fellow monkeys,
I have 3 companies: company A owns 70% of company B and 50% of company C, no consolidated accounts available. I want to buy 100% in company A, B and C.
Are company A's 'investments in subsiduaries B and C' a net cash position?
Many thanks for a feedback!
Why would you label it a net cash position? Cash should only include cash and cash-like items. You could make an argument that if these positions are highly liquid it is cash-like, but I still think it's wrong to call it a "net cash position."
If company B and C are associated with the bread and butter of company A I stick it in non-current assets and put the related income/expense in operating income. If the investments in B and C are completely unrelated to A's business you put it in financial assets and label the income/expense capital gains/losses.
If you control B and/or C (control meaning majority voting rights/ appointment right for majority of directors) you need to consolidate them in your accounts and recognize NCI, you cannot treat them as investments (from auditor point of view).
From valuation point of view it might make sense to treat them separately.
Don't get your question on 'net cash'. In a EV to Equity value the NCI is a negative number (decreasing equity value). If you don't consolidate, then the investments are a cash-like item.
Thank you both for your answers. Let me clarify, I am looking at it from a purchase price point of view: If I assume company A’s 'investments in subsidiaries B' as a cash-like position, I have to pay for it right? Then if I value company B separately, and company A holds a say 90% position in it, if I pay 90% of the purchase price for company B to company A, I am paying double no?
If you assume the stake in B and C are both investments, you need to value A, B and C separately with separate EV to Equity Value bridges.
If you buy company A, you pay to the current owner: equity value of A (assuming credit facilities stay in place) + % of equity value of B + % of equity value of C
If A does not control B and C often there is a discount (vs control premium) to a normal DCF as you cannot influence strategy, cant get full synergies, etc.
Thank you Rover.
I was confused because the seller's banker included the balance sheet line 'investment in subsidiaries' in his net debt table for company A.
So I replace the balance sheet line /book value of subsidiaries with the market value of % equity in B and C.
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