Modelling Question - How to Handle Substantial Associated Companies Position?
Dear WSO forum,
I am a PE new-joiner, so please be kind if the questions sounds stupid.
I recently came across an interesting target with sustantial associated companies on their balance sheet (shares in those companies around 25-40%, mostly acquired, with one even a PTLA exists) + some loans to them; EV of the target around €120m, Associates around €40m + €5m loans.
I recognized the Associates + Loans as Cash Equivalents in the EV-EqV bridge since their earnings are not included in the Parent's P&L, but I was wondering if this is still the right approach given they are substantial and operational relevant to them. Given their operational relevance an acquirer would want to keep them, thus it is a heavy position that needs to be financed, substantially increasing the Purchase Price.
So, the following questions:
- Is the EV-EqV consideration correct in your opinion or would you make a pro-forma adjustment in the parent's EBITDA/EBIT to account for the associated companies and therefore include them in the EV due to their relevance?
- How would you account for that associates position going forward in terms of P&L recognition (Equity method + separate projection of their financials and then added income below EBIT + non-cash correction)? Would you also include an annual revaluation of them?
- When calculating net debt and at exit calculations would you add them as Cash Equivalents in the bridge again (as I assume)?
Thanks a lot in advance!
A fellow Monkey
Following
I think people often get confused re share in associates being backed out of EV because its viewed as liquid / non-core. The actual reason is because the market value (market cap) inherently includes the value of share in associates but equity accounting means its not included in REV, EBITDA, EBIT. With all these questions you have its important to remember that the only thing that matters really is that its all done like-for-like.
Sure you can add pro forma adjustment for EBITDA and leave share associates in the EV, but at the end of the day your mult will likely not change because your share in associate if considered a core business should be valued by the market at a similar multiple. Plus it would be hugely diluted by the pull of the broader mult which means likely no impact at all. In practice, its much easier to back out share of associate from EV because numbers are easily found in the financials VS. going through each sub and trying to pro forma the EBITDA which will be near impossible. Hope this helps. Re your net debt questions, again important to be like-for-like, so just make sure you are thinking about that and back solving to market value.
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