Non-Controlling Interests and Equity Investments
I found the following excerpt in a book about valuation that I do not understand:
"Non-Controlling Interests and Equity Investments
Leave these items out of FCF projections. Doing anything else is equivalent to torturing yourself for fun.
Yes, you could follow the inclusion/exclusion principle and include Net Income Attributable to Non-Controlling Interests and Net Income from Equity Investments in FCF, and then leave Non-Controlling Interests and Equity Investments out of the Enterprise Value to Equity Value calculation, but think of the challenges that presents:
i) In an unlevered analysis, you'd have to reverse the partially owned companies' taxes, net interest expense, and other income/expense so you can determine their EBITs, and then subtract or add the relevant percentage of their EBITs..."
I do not really understand the part in Italic. I would really appreciate if someone could please clarify it.
FYI, this book defines FCF as follows:
FCF = CFO - Capex
FCF = Net Income + Non-Cash Items - Changes in WC - Capex
If you add Net Income Attributable to Non-Controlling Interest ("NCI") to FCF, when you move from EV to Equity Value, you do not subtract the NCI. Therefore, Equity Value will comprise NCI, since FCF it also includes Net Income Attributable to NCI.
However, Net Income from Equity Investments is already included in FCF, since FCF comprises Net Income, so I do not understand why should I leave Equity Investments out of the EV to Equity Value calculation.
You do add income attributable to NCI to fcf because you're looking at the cashflows to the whole company. When you get your EV, you then subtract the minority interest ownership of the company (found in the owners equity of the b/s) from the enterprise value, along with debt, pension liabilities etc to get to equity value as these are claims on the company that are not attributable to the holders of the common outstanding equity. The last bit is the important part - the shares outstanding only have a residual claim on the part of the company that ISN'T owned by another company (which is the minority interest).
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