What happens to enterprise value when a company sells its minority interest?
My initial thought is that when a company sells its minority interest, obviously the minority interest goes down, if the company is receiving cash for it, then the net debt goes down; if the market is pricing in the lost of net income, then the equity value also go down. Then that means the enterprise value goes down THAT much from a sale of minority interest?? Am I missing something? Thanks guys.
Cash goes up so that should offset some of the decreases
While cash goes up it will decrease EV even more because it is subtracted from total debt to get to net debt
How does one sell minority interest? The exact definition of minority interest is the portion of a subsidiary not owned by the majority shareholder. I.e. parent company owns 70%, it would record a minority interest for the 30% portion not owned on its liability + equity section of the balance sheet.
Please feel free to enlighten me if I am missing something here.
That's exactly what I needed I swapped the definition of noncontrolling equity investment and noncontrolling interest. Thanks mate.
So what is the actual answer? Does Enterprise Value just go down if minority interest is sold? What happens to cash and net debt?
You cannot sell minority interest. It represents the portion of a subsidiary not owned by the parent company.
minority interest is recorded when a company acquires a greater than 50% stake in a subsidiary without owning 100% of it. Minority Interest in and of itself cannot be sold. The parent company does not own it. The only way to have this item removed is to either 1) acquire 100% of the subsidiaries securities or 2) reduce ownership in the subsidiary to 50% or less
Thanks for the explanation, Sk3tchy!
Equity value would go up if selling price of minority stake > what the market had valued it before the sale, and vice versa. In a perfectly efficient market equity value doesn't change because the drop in net income is exactly offset by the increase in cash.
alternative of adding minority interest to Enterprise Value (Originally Posted: 04/02/2012)
It is easy to under why we add minority interest in the enterprise value formula.
But, instread of adding minority interest to Enterprise Value, why don't we just subtrack the portion of sales or EBITDA that the parent does not own?
Because oftentimes the company won't report broken out segment data for the subsidiary so it's just easier/quicker to add minority interest to EV
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