Whenever a company owns over 50% of another company, it is required to report the financial performance of the other company as part of its own performance. So even though it doesn't own 100%, it reports 100% of the majority-owned subsidiary's financial performance. In keeping with the "apples-to-apples" theme, you must add Minority Interest to get to Enterprise Value so that your numerator and denominator both reflect 100% of the majority-owned subsidiary. But I can't understand why we should add Minority Interest? Using Minority Interest with "-" (I mean subtract Minority Interest) seems more reasonable for me. Can you please explain these for me? Thanks!
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We do NOT add non-controlling/minority interest to Total Enterprise Value (same thing as Enterprise Value). The minority interest is already embedded within TEV. You probably read somewhere that we add minority interest in the formula for TEV and got confused. To clarify, for example, we add minority interest to EQUITY value to get to the TEV. So to get to EQUITY value you need to subtract minority interest from TEV.
Suppose Company A owns 60% of Company B, so when you examine the figure for Company A's EBITDA it would contain ALL of Company B's EBITDA even though Company A doesn't own 100% of that financial performance. Suppose you run a DCF to find TEV) for Company A. Upon summing up all discounted cash flows you get a figure called Total Enterprise Value, and that is equal to Net Debt (of company A) + Equity (of company A) + Preferred Stock (of company A) + Minority Interest (of company B) and then a lot of other things like leases, NOLs, pension shortfall, equity investments, etc. This TEV value needs no adjustments.
The issue is only when you start with the Market Cap / Equity value for Company A. When you examine TEV for Company A it is usually in context of a valuation multiple (TEV/EBITDA). Since EBITDA for Company A contains 100% of Company B's EBITDA, that means you need to add the 40% minority interest of Company B to the Company A equity value (along with Company A's net debt, pref stock, etc.) to get to an appropriate TEV numerator for the multiple. Equivalently, you could just subtract out the portion of EBITDA (40% of Company B) that Company A doesn't own and then not have to do any adjustment to get to TEV.
Well explained. Conceptually, it helps to view the minority interest as financing provided to Company A by its co-owner of Company B.
Amazing! Now I have understood about what numerator and denominator it was said there (TEV/EBITDA) and all have became clear to me. Thank you so much, Joe-Smith123!
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