Conglomerate valuation

When valuing multi-business organizations, do people generally value each business line seperately and then make adjustments for the benefits of being under the same corporate unbrella such as tax effects (i.e. losses; higher debt capacity).

Also a few more questions:
1) how is minority interest generally projected and why is it added back on the SCF?

2) An unconsolidated subsidiary is another seperate entity in which the parent company owns 50%+ of the company, but is just not consolidated for technical reasons. So how exactly should one interpret the "investments in unconsolidated subsidiary" account on the SCF? What exactly would this entail?

 
Best Response

1). Yes, the best approach to value conglomerates or large groups with very disparate business lines is the Break-Up Analysis method (also known as Sum-of-parts valuation). Under this method, each part would be valued separately using DCF, Trading Comps or Deal Comps and then summed together. It's also important to remember to deduct the corporate overheads (not allocated to business lines).

2). Ideally, you would have access to projections from the invested companies and account for them in your consolidated financials. However, it's almost impossible to get them and sometimes it's not worth the efforts (and it's generally immaterial). One way I have seen people doing that is to look at historical trends (growth over the last 5 - 7 years) and apply this same growth rate over the entire projetion period or alternatively grow it by inflation. For the MI on the balance sheet, just keep it constant throughout the projection period since it is not relevant/material.

3). Unconsolidated subsidiaries should be valued separately as well using one of the most common methodologies and then summed to Enterprise Value (like excess cash, it is considered a non-operating asset and therefore should be added to TEV to get to Equity Value - since it is not part of the core business operations but still part of the shareholder's worth - like excess cash).

 

Ya, SOTP is really your only option with a conglomerate and therefore you'll also have to invest in the whole thing.

That said, if you are confident that the market will react positively, you could buy now and then sell after their razor plan is announced. They'll likely get a bump that day even if their Gillette business were only a small component (don't know enough about P&G to know size).

 

In my opinion, P&G, as well as many of the conglomerates you are comparing to, are yield plays. The value of the entire company is that it has cash flow that is routinely and predictably returned to shareholders, rather than doing a SOTP. There are certainly good reasons to value the business lines independently, but as you pointed out in your original post, there are many different business lines that make up where another falls short and over time balance out.

 

You looking for PG to trade up on an absolute basis or just outperform peers? I think the latter is a decent bet but I would not expect the name to trade up while engaging in a price war. Trian getting involved is your real ticket but I would think it is a long road for them given PG's massive market cap. They just cannot own enough to really grab the power they need. PG is culling divisions and ostensibly cutting costs already. They are not under enough pressure to embark on truly transformational change (like firing 25% of the workforce).

 

Why do you think that lower prices will result in higher profits? You may boost revenues, but at the expense of margins.

SOTP seems like the only way to really get your head wrapped around this behemoth.

Grooming made up ~14% of FY2016 net profits before tax (excluding corp expenses) - doesn't take into account the the grooming segment likely includes other revenues besides razors & blades. Taking peak grooming profits of $2,589mm in FY2014 as a best case scenario, this could add $580mm to overall profits relative to FY16. Thats ~5% of consolidated pretax profits. Not insignificant, but definitely not a game changer in terms of valuation.

It's like saying that you think that the Capitals will win the cup because Ovechkin is going to play great this year and forgetting that there are 19 other players on the roster.

 

That's good advice.

For point 1...yes. That's correct, and no there isn't really any way around it if you want a good model.

The second point has a fairly simple answer. You're going to have to make simplified assumptions based on historical performance and your assessment of future conditions, management competency, and the company's SWOT.

 

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