Enterprise Value and Minority Interest

Why do we add back the minority interest when calculating the Enterprise value?

What is Minority Interest?

Minority interest is an accounting concept that refers to a situation when a parent company owns over 50% of another firm. Due to the fact that the parent company has majority ownership of the subsidiary, it includes the assets, income, liabilities etc of the subsidiary in its balance sheet. However, if it does not own 100% of the subsidiary then it does not actually have claim to 100% of the financial performance, and whatever percentage it does NOT own must be subtracted as a liability.

Adding Minority Interest in the Enterprise Value (EV) Formula

First, let's review the Enterprise Calculation.

The calculation for Enterprise Value is:

Market Capitalization + Debt + Minority Interest + Preferred Shares - Cash & Cash Equivalents

With that being said, minority interest is an important factor in Enterprise Value. If the company being valued has majority ownership in another company, whatever percentage it does NOT own must be added on to equity value because the parent company will not have all of the claim on assets, income etc of the subsidiary.

Another way to think of it is that since you are accounting for the full subsidiary throughout the financial statements - if we want to look at metrics such as EV/Revenue or EV/EBITDA the Enterprise value needs to account for the value of the main company and the subsidiary since the denominator accounts for the main company and the subsidiary. This allows you to compare apples to apples rather than apples to oranges.

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Comments (74)

Sep 26, 2007 - 12:10pm

Minority interest is part of the enterprise value. It could be thought of as the minority ownership in the company. Since you're trying to find the total value of the company(EV), then it clearly must be added in.

If you get a chance to take Business combinations and consolidations while in school, do it.

Feb 11, 2015 - 12:23am

Bracketracer:

minority interest is part of the enterprise value. It could be thought of as the minority ownership in the company. Since you're trying to find the total value of the company(EV), then it clearly must be added in.

If you get a chance to take Business combinations and consolidations while in school, do it.

This is not right at all. Like I can't even fathom your logic behind thinking this. If you get a chance to take Business combinations and consolidations while in school, do it again.

Feb 11, 2015 - 12:24am

minority interest and Calculation of EV (Originally Posted: 07/27/2011)

Dear Fellow Bankers,

This has been discussed a lot and understand most (but not all) of it.

I do understand what minority interest means. But I do NOT understand why it has to be ADDED to the market value of equity to arrive at the EV.

Let's say - there are 3 companies P, S, O.
Parent P owns 70% of Subsidiary S.
And some other company named O owns rest of the 30% in S.

Now P has to consolidate its statements and it shows minority interest (non-controlling interest) in its shareholders' equity section. If S has $100 of profit then $30 (=30% of the $100 that P does NOT own) is shown in the P's balance sheet as minority interest.

This much is ok. I understand this much.

Our goal is to calculate multiples such as EV/Sales. I also understand that in order to make the numerator compatible with denominator we have minority interest in the numerator equation to calculate EV. This much is ok.

But I do not know why it is added ? And why not subtracted ?

Feb 11, 2015 - 12:25am

This is my understanding of it: When P owns 50%+ of S, it consolidates its financial statements and reports all of S's revenues, expenses, etc which is reflected in the denominator of multiples like EV/EBITDA and EV/Sales. So in order to make it more "apples to apples" you have to add back the minority interest in the numerator to account for all of S's value (since the denominator counts for all of S's operating results).

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Feb 11, 2015 - 12:26am

The above poster is right.

minority interest is the biggest scam that FASB has ever pulled.

Initially minority interest showed up in liabilities. So when you're looking at credit multiples: Liabilities / Equity or Liabilities/Total Capital, you would see that the ratio increases if you have non-controlling interest in a company (in this case, your 30%).

But in 2008 FASB changed it so that minority interest shows up in Equity instead of liabilities. This improves credit multiples: both assets and equity go up, and your % equity of your total assets goes up.

Sep 26, 2007 - 12:18pm

usually you are trying to find the total value of the business, you should realize that any common share or equity analysis should then also reflect the minority interest adjustment (the equity value leftover isn't all yours, some goes to the minority interest holder). Usually just a rounding error, so doesn't matter. Matters only when minority interest begins to make up a big portion of the company

Best Response
Feb 11, 2015 - 12:29am

Enterprise Value and minority interest: finance-dictionary (Originally Posted: 02/20/2012)

This is an edited version of my previous post to clarify some issues related to the calculation of EV as well as other minor edits

I have come across a number of questions on this and other forums regarding the calculation of "Enterprise Value" (EV), how to deal with minority interest and why we deduct cash in the EV calculation. This topic seems to be an interview favorite and almost never fails to generate some interesting replies. However, in my view at least, even a lot of interviewers asking the question fail to fathom exactly what it is they are asking or its implications, instead expect some rote formulaic response they deem as correct, something akin to what is written up in Wikipedia or the like.

For most young budding IB analysts and others in the field, the calculation of EV is fairly straightforward: EV=Market Cap + Debt – Cash. This is usually the standard answer for standalone companies. It gets more complex when consolidated financials are involved, and the term "minority interest" (MI) rears its ugly head. An interview question would be posited to some starry-eyed candidate dreaming of striking it big: "Calculate the EV of XYZ that owns 51% in ABC with so and so cash and debt involved." The seemingly simple question really disconcerts some people, leading to a flurry of posts as to what exactly EV is, why we subtract cash, and how does one calculate EV in cases of consolidated financials involving minority interest?

The purpose of this post is to present this writer's view that this seemingly innocent question is not deserving of a simple all encompassing reply, and that many considerations need to be taken into account. Sometimes so many that the entire relevance of the question needs to be re-thought. For the purpose of this discussion, let us consider the case in which a majority (>50% ownership) or controlling interest (which can sometimes include less than 50% ownership) results in consolidated financials involving a minority interest.

Let us begin first with what exactly is Enterprise Value:

Simplistically, it is the "Value of Operations". For a firm, ignoring capital structure for the moment,

Value of Firm =PV(Net assets today + Future Growth Opportunities)

Future growth opportunities from core operations can be called "Value of Operations", but in order to have an ongoing operations, you need an asset base today, an operating asset base for working capital needs. So, we can rewrite the above equation as:

Value of Firm =PV(Net Operating Assets today + Net Non-Operating Assets today +
Future Growth Opportunities)
=PV (Operations + Net Non-Operating Assets)
=Value of Operations + Net Non-Operating Assets today

We refer to Enterprise Value ("EV") as the "Value of Operations". It would be intrinsic amount the market is valuing the core operating assets of the company. Since the value of the firm is the total amount which is split between capital providers, it follows, that to ordinary equity holders, their share, which is typically defined as the "market cap" is:

Mkt. Cap=EV + Current Value of Net Non-Operating Assets – (Debt + Preferred + Other senior Claims)

The value of the firm comes from the value of operations + the net value of non-operating assets. (Strictly speaking, adding debt, in many cases depending on the operating regime, will add value to the enterprise because in most cases, interest on debt is tax deductible – the "tax shield" and the company will pay less taxes.) In the subordination hierarchy, debt & preferred holders will get seniority to ordinary equity holders, who will get the residual, which is why the debt, preferred and senior claims are subtracted to get market cap. So to get EV, you'd have to add them to market cap. A lot of questions concern why we subtract "cash" in calculating EV. This above equation shows why – more on this below.

The Net-Non operating assets usually consist of "excess cash", but could also include other items like appreciated land, IP, patents or investments, or even certain liabilities and commitments not related to the core operations of the firm. It's important to consider if these are not being double-counted in the EV itself. EV is an IMPLIED figure, after taking into account what the market is valuing the stakeholder stakes (debt, common equity, preferred, etc) and all the other identifiable assets. A lot of discretion is sometimes required on the analyst's part to evaluate the "operating" vs. passive vs. off-balance sheet components of value and understand what is reflected in the market prices and at what discount/premium, but the basic question the analyst is trying answer when calculating the EV is: how much are the operations by themselves worth, given how the market is valuing the stakeholder stakes and net assets?

In addition to the calculating the market implied EV, an analyst should also conduct and analyze the FCF (free cash flow) to the firm to validate this number. A secondary but extremely important point is how to calculate these FCFs, especially the treatment of stock based compensation, a seriously underestimated and misunderstood element of valuation – I've already written about this controversial topic on this forum in the past.

For simplicity and ease, we usually deduct ALL the cash & equivalents to derive a value for EV, rather than just the "excess cash". Reason: Who has the time to adjust for what is excess and what is not? Strictly speaking, this is incorrect. The going "explanation" for such logic is that if we were to "purchase" the enterprise, we would assume all the debt, but this would be offset by the cash at hand. The main flaw in this logic (other than the fact that one rarely assumes all the debt without restructuring it some way in any acquisition), is that the fact that the market cap and debt values assume the firm is a going concern, and to keep the concern going, you need operating cash at hand for working capital. So unless you're planning on liquidating the enterprise, all that cash is not really going to be available, even if you were to "purchase" the entire firm and assume the debt. Only the "excess" cash will be available for that purpose of retiring the debt. But it is simply easier to deduct the whole amount. These calculated EV values are mainly used for comparison purposes as a ratio of some other metric, not as proxies for the actual price a firm might be acquired for – that would be far more complicated – involving premiums, transaction costs, breakup fees, debt covenants, synergies, restructuring costs, tax impacts etc.

Some purists would argue that the interest on excess cash is already incorporated into the FCF thus thereby making the "excess" not excess, but that is usually not very significant and distracting from the discussion. If this interest were a significant portion of the cash flows, one would have to consider the fact that the market would take this into account in determining the cost of capital to discount the company's FCF – the company's WACC would change, because a large component of its earnings and cash flow would be essentially be lower risk, and the market cap would still reflect the amount appropriately. But this still does change the fact that the "value of operations" should only include the level of cash that is required for operational needs.

So now, let us move on to the case where there is a "minority interest" (MI). MI arises when a company owns more than 50% or exerts a significant controlling influence over another entity "the sub" (and in some cases even if the ownership is less than 50%). In that case, accounting rules, at least US GAAP, usually require consolidating the sub's financials into the parent company, as if it were 100% owned. The portion of the net EQUITY that is not owned by the parent at the time of the acquisition, is listed as minority interest. Additionally in the income statement, this is also deducted from the Net income usually with a "Non-controlling interest" label, because the income statements too are consolidated as if they were one company, 100% owned.

So, when one tries to calculate EV for a company with MI, some interesting phenomenon results. For simplicity, let us just assume there is only one sub involved. Bear in mind that MI is a "book" value that is derived at the time of acquisition. It can vary dramatically given time and change in the operating or value profile of the sub (i.e. has it suddenly become very valuable due to PE expansion or recently become very profitable) since the acquiring of the ownership stake. Unless the company is in a distressed state, the current book value of debt is probably a good assumption for market value for analysis purposes. It is reasonable to expect that the market cap of the parent would include the market value of the percentage ownership of the equity in the sub. So, when asked the question, what is the EV of a parent that owns a less than 100% stake in a sub, what is the correct response?

If we use the standard formula: EV=Mkt Cap + Debt – Cash, we realize that Mkt. Cap is a blended figure, i.e. Mkt. Cap of the parent + % of the market value of the equity of the sub. However, the Debt & Cash are consolidated as if 100% of the sub was owned. Thus we get a spurious number. What if we add MI to that figure? Well, then we get a proportioned Market Cap + a historical MI + consolidated Debt – consolidated Cash. Now that you've calculated this new value what is the relevance of this figure? Not much actually, from an economic perspective. Some would say, when calculating ratios like EV/EBITDA or EV/Sales, this aggregate value makes sense to use, since the EBITDA and other income statement metrics are consolidated as if 100% (one has to be careful if there are intercompany transactions between the parent and sub – for instance if a company owns a part of a supplier, or its customer – which can have serious implications depending on the analysis). Assuming there aren't any intercompany complications, if you do construct a ratio like EV/EBITDA by adding back MI, you'll get in the numerator, an attempt at EV of the parent +% of sub (the mkt caps are proportioned, but the balance sheet is consolidated), and in the denominator, a summed EBITDA of the two companies. Does this result make sense? That is the equivalent of looking at (a+%ofb)/(x+y) for the combined entity whereas each company individually would have a ratio a/x and b/y. Depending on the numerical values of each company's actual EV's and EBITDA's, it could give some seriously irrelevant numbers that have the illusion of looking relevant. Also if a majority of the EBITDA comes from one entity and majority of the EV of the total derives from another, its another relevance inducing headache. Or if the companies are in different industries, where the EV/EBITDA's are expected on average to be different, this further adds to the complication as to the validity and usefulness of a combined number. In my view, this combined ratio too is a spurious number. And what is the point of all this calculation? Why do we even care about this jumbled mixed up EV/EBITDA figure? Beats me. If you're trying to build a comp table, there are more relevant ways to gauge relative value – try using pure plays.

What about subtracting the MI from the EV calc? Again, now you have a Mkt. Cap that is already reflecting the correct % of the earnings contribution, assuming the markets are pricing the value correctly. You have the consolidated debt and consolidated equity. Subtracting out MI gives you what? I'm not even sure there is a term for whatever calculated abomination that results. Excluding MI altogether. Well, to the extent that the cash and debt's are in equal proportions in both the parent and sub, that might be the best option to get to the most accurate 'quick' estimate of the combination's EV (since the cash and debt would cancel out). But again, these are questionable assumptions, and what good is a combined EV if the companies are in different industries and the ratio is constructed in that (a+b)/(x+y) way? The safest way, in my view, is to first ask, what is it you're exactly trying to calculate, why, and then use a DCF to isolate the cash flows relevant to the stakeholder to which they matter and value those using current market values and projections.

Not to belabor the discussion, but another interesting complication arises from the debt subordination structure. Let us assume, for example, A owns 51% of B. B has little cash, assets and equity but a lot of debt. A by itself has no debt. In that case, 100% of B's debt would be consolidated onto the parents books. So now if you look at the parent, it looks like it has a ton of debt. Is this debt real? Consider the situation in which B goes bankrupt. B's debt holders will normally only have a claim on B's assets – NOT A's (if A structured the deal intelligently). So in that case, despite a lot of debt showing up in the consolidated A's financials, it is technically not something A's shareholders should have to worry about too much. Their exposure would be to the extent of their EQUITY investment in B. At worst they'll lose what they invested – not more. This "loss isolation" principle is basically how PE (private equity) funds operate and also where they derive a lot of their value – if one entity goes belly up, the debt holders do not have claim to the other investments or assets of the PE fund - usually only to those assets secured in the entity that went bankrupt. The PE fund takes a loss on the equity, which was small relative to the EV of the overall investment, shrugs, and moves on.

Thus one might even reasonably ask, what is the point of calculating EV for a company that has consolidated controlling interests in other companies, especially when large amounts of debt are involved? Assuming you have to, so what is the right way to do it? Well, again it depends on what exactly you are trying to do. Why do you want to calculate this EV? If it is for getting valuation ratios in a comp table, it would be better to use pure plays. Else use a DCF to get the most accurate estimate of the relevant cash flows to the relevant stakeholders. There is no substitute for digging into the footnotes and historical filings to figure out or estimate what assets belong to whom. Certainly, a rote answer like EV=Mkt. Cap + MI +Debt – Cash might suffice in an interview, but I would hazard the real answer is a little more complicated.

Feb 11, 2015 - 12:30am

Blew my mind.

For those of you who actually want to learn something relevant to the banking trade, read this.

Thanks (im going back to read your other posts as well. You clearly know your shit)

Array

  • 1
Feb 11, 2015 - 12:32am

Liked the analogy of a company that owns over 50% of another company but has no debt, while the sub has a lot of debt, to a private equity company. Definitely helped me better understand how PE works. Entire post was really helpful actually, would recommend anyone still going through interviews or otherwise to read it all.

Feb 11, 2015 - 12:33am

Boom!

Start a blog.

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
  • 1
Feb 11, 2015 - 12:34am

Bumping.....just because

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
  • 1
Feb 11, 2015 - 12:35am

"Some purists would argue that the interest on excess cash is already incorporated into the FCF..."

Why would this be the case? In most cases, you are not considering interest income in FCF calculations so excess cash is not included in the EV which is the result of DCF. When constructing your cash flows, you are taking into operating revenues, operating costs etc so that your DCF result is the value of the operating assets, the EV.

Going to the equity value you add this cash as it was not already there in DCF in the first place. Additionally you would want to add any non operating assets and deduct any non operating liabilities, provided that these were not included in DCF in the first place. (i.e. cash from these assets/liabilities)

Feb 11, 2015 - 12:36am

FCF by definition, is all the cash flow that is available to the owners of capital - the stock AND bond holders, excess or not. How we value the streams that make up the FCF is really at issue here. I understand what you are saying and don't disagree. I did point out that if excess cash was included in the FCF used to calculate the EV, then the discount rate would have to be adjusted. Ultimately you should get the same answer::PV of FCF(without interest from excess cash) @ discount rate + EXCESS CASH vs. PV of FCF(with interest from excess cash) @ adjusted discount rate + ZERO excess cash.

"Some purists would argue that the interest on excess cash is already incorporated into the FCF thus thereby making the "excess" not excess, but that is usually not very significant and distracting from the discussion. If this interest were a significant portion of the cash flows, one would have to consider the fact that the market would take this into account in determining the cost of capital to discount the company's FCF - the company's WACC would change, because a large component of its earnings and cash flow would be essentially be lower risk, and the market cap would still reflect the amount appropriately. But this still does change the fact that the "value of operations" should only include the level of cash that is required for operational needs."

The thing is that it's usually extremely difficult, if not impossible, to tell what is excess vs. what is not. That's really a subjective determination. So then when you are determining the what the appropriate discount rate should be, when you list out comps for your baseline assumptions, you'd have to try and isolate any "excess" they have may have as well, for the market returns will reflect that implicitly. At some point the value-add from the analysis approaches not worth doing it, unless it's patently obvious what the value drivers are. But yes, I agree I could have phrased it better in my post and thanks for pointing that out.

Feb 11, 2015 - 12:37am

Enterprise Value and minority interest: interview favorite (Originally Posted: 02/20/2012)

This is an edited version of my previous post to clarify some issues related to the calculation of EV as well as other minor edits

I have come across a number of questions on this and other forums regarding the calculation of "Enterprise Value" (EV), how to deal with minority interest and why we deduct cash in the EV calculation. This topic seems to be an interview favorite and almost never fails to generate some interesting replies. However, in my view at least, even a lot of interviewers asking the question fail to fathom exactly what it is they are asking or its implications, instead expect some rote formulaic response they deem as correct, something akin to what is written up in Wikipedia or the like.

For most young budding IB analysts and others in the field, the calculation of EV is fairly straightforward: EV=Market Cap + Debt – Cash. This is usually the standard answer for standalone companies. It gets more complex when consolidated financials are involved, and the term "minority interest" (MI) rears its ugly head. An interview question would be posited to some starry-eyed candidate dreaming of striking it big: "Calculate the EV of XYZ that owns 51% in ABC with so and so cash and debt involved." The seemingly simple question really disconcerts some people, leading to a flurry of posts as to what exactly EV is, why we subtract cash, and how does one calculate EV in cases of consolidated financials involving minority interest?

The purpose of this post is to present this writer's view that this seemingly innocent question is not deserving of a simple all encompassing reply, and that many considerations need to be taken into account. Sometimes so many that the entire relevance of the question needs to be re-thought. For the purpose of this discussion, let us consider the case in which a majority (>50% ownership) or controlling interest (which can sometimes include less than 50% ownership) results in consolidated financials involving a minority interest.

Let us begin first with what exactly is Enterprise Value:

Simplistically, it is the "Value of Operations". For a firm, ignoring capital structure for the moment,

Value of Firm =PV(Net assets today + Future Growth Opportunities)

Future growth opportunities from core operations can be called "Value of Operations", but in order to have an ongoing operations, you need an asset base today, an operating asset base for working capital needs. So, we can rewrite the above equation as:

Value of Firm =PV(Net Operating Assets today + Net Non-Operating Assets today +
Future Growth Opportunities)
=PV (Operations + Net Non-Operating Assets)
=Value of Operations + Net Non-Operating Assets today

We refer to Enterprise Value ("EV") as the "Value of Operations". It would be intrinsic amount the market is valuing the core operating assets of the company. Since the value of the firm is the total amount which is split between capital providers, it follows, that to ordinary equity holders, their share, which is typically defined as the "market cap" is:

Mkt. Cap=EV + Current Value of Net Non-Operating Assets – (Debt + Preferred + Other senior Claims)

The value of the firm comes from the value of operations + the net value of non-operating assets. (Strictly speaking, adding debt, in many cases depending on the operating regime, will add value to the enterprise because in most cases, interest on debt is tax deductible – the "tax shield" and the company will pay less taxes.) In the subordination hierarchy, debt & preferred holders will get seniority to ordinary equity holders, who will get the residual, which is why the debt, preferred and senior claims are subtracted to get market cap. So to get EV, you'd have to add them to market cap. A lot of questions concern why we subtract "cash" in calculating EV. This above equation shows why – more on this below.

The Net-Non operating assets usually consist of "excess cash", but could also include other items like appreciated land, IP, patents or investments, or even certain liabilities and commitments not related to the core operations of the firm. It's important to consider if these are not being double-counted in the EV itself. EV is an IMPLIED figure, after taking into account what the market is valuing the stakeholder stakes (debt, common equity, preferred, etc) and all the other identifiable assets. A lot of discretion is sometimes required on the analyst's part to evaluate the "operating" vs. passive vs. off-balance sheet components of value and understand what is reflected in the market prices and at what discount/premium, but the basic question the analyst is trying answer when calculating the EV is: how much are the operations by themselves worth, given how the market is valuing the stakeholder stakes and net assets?

In addition to the calculating the market implied EV, an analyst should also conduct and analyze the FCF (free cash flow) to the firm to validate this number. A secondary but extremely important point is how to calculate these FCFs, especially the treatment of stock based compensation, as seriously underestimated and misunderstood element of valuation – I've already written about this controversial topic on this forum in the past.

For simplicity and ease, we usually deduct ALL the cash & equivalents to derive a value for EV, rather than just the "excess cash". Reason: Who has the time to adjust for what is excess and what is not? Strictly speaking, this is incorrect. The going "explanation" for such logic is that if we were to "purchase" the enterprise, we would assume all the debt, but this would be offset by the cash at hand. The main flaw in this logic (other than the fact that one rarely assumes all the debt without restructuring it some way in any acquisition), is that the fact that the market cap and debt values assume the firm is a going concern, and to keep the concern going, you need operating cash at hand for working capital. So unless you're planning on liquidating the enterprise, all that cash is not really going to be available, even if you were to "purchase" the entire firm and assume the debt. Only the "excess" cash will be available for that purpose of retiring the debt. But it is simply easier to deduct the whole amount. These calculated EV values are mainly used for comparison purposes as a ratio of some other metric, not as proxies for the actual price a firm might be acquired for – that would be far more complicated – involving premiums, transaction costs, breakup fees, debt covenants, synergies, restructuring costs, tax impacts etc.

Some purists would argue that the interest on excess cash is already incorporated into the FCF thus thereby making the "excess" not excess, but that is usually not very significant and distracting from the discussion. If this interest were a significant portion of the cash flows, one would have to consider the fact that the market would take this into account in determining the cost of capital to discount the company's FCF – the company's WACC would change, because a large component of its earnings and cash flow would be essentially be lower risk, and the market cap would still reflect the amount appropriately. But this still does change the fact that the "value of operations" should only include the level of cash that is required for operational needs.

So now, let us move on to the case where there is a "minority interest" (MI). MI arises when a company owns more than 50% or exerts a significant controlling influence over another entity "the sub" (and in some cases even if the ownership is less than 50%). In that case, accounting rules, at least US GAAP, usually require consolidating the sub's financials into the parent company, as if it were 100% owned. The portion of the net EQUITY that is not owned by the parent at the time of the acquisition, is listed as minority interest. Additionally in the income statement, this is also deducted from the Net income usually with a "Non-controlling interest" label, because the income statements too are consolidated as if they were one company, 100% owned.

So, when one tries to calculate EV for a company with MI, some interesting phenomenon results. For simplicity, let us just assume there is only one sub involved. Bear in mind that MI is a "book" value that is derived at the time of acquisition. It can vary dramatically given time and change in the operating or value profile of the sub (i.e. has it suddenly become very valuable due to PE expansion or recently become very profitable) since the acquiring of the ownership stake. Unless the company is in a distressed state, the current book value of debt is probably a good assumption for market value for analysis purposes. It is reasonable to expect that the market cap of the parent would include the market value of the percentage ownership of the equity in the sub. So, when asked the question, what is the EV of a parent that owns a less than 100% stake in a sub, what is the correct response?

If we use the standard formula: EV=Mkt Cap + Debt – Cash, we realize that Mkt. Cap is a blended figure, i.e. Mkt. Cap of the parent + % of the market value of the equity of the sub. However, the Debt & Cash are consolidated as if 100% of the sub was owned. Thus we get a spurious number. What if we add MI to that figure? Well, then we get a proportioned Market Cap + a historical MI + consolidated Debt – consolidated Cash. Now that you've calculated this new value what is the relevance of this figure? Not much actually, from an economic perspective. Some would say, when calculating ratios like EV/EBITDA or EV/Sales, this aggregate value makes sense to use, since the EBITDA and other income statement metrics are consolidated as if 100% (one has to be careful if there are intercompany transactions between the parent and sub – for instance if a company owns a part of a supplier, or its customer – which can have serious implications depending on the analysis). Assuming there aren't any intercompany complications, if you do construct a ratio like EV/EBITDA by adding back MI, you'll get in the numerator, an attempt at EV of the parent +% of sub (the mkt caps are proportioned, but the balance sheet is consolidated), and in the denominator, a summed EBITDA of the two companies. Does this result make sense? That is the equivalent of looking at (a+%ofb)/(x+y) for the combined entity whereas each company individually would have a ratio a/x and b/y. Depending on the numerical values of each company's actual EV's and EBITDA's, it could give some seriously irrelevant numbers that have the illusion of looking relevant. Also if a majority of the EBITDA comes from one entity and majority of the EV of the total derives from another, its another relevance inducing headache. Or if the companies are in different industries, where the EV/EBITDA's are expected on average to be different, this further adds to the complication as to the validity and usefulness of a combined number. In my view, this combined ratio too is a spurious number. And what is the point of all this calculation? Why do we even care about this jumbled mixed up EV/EBITDA figure? Beats me. If you're trying to build a comp table, there are more relevant ways to gauge relative value – try using pure plays.

What about subtracting the MI from the EV calc? Again, now you have a Mkt. Cap that is already reflecting the correct % of the earnings contribution, assuming the markets are pricing the value correctly. You have the consolidated debt and consolidated equity. Subtracting out MI gives you what? I'm not even sure there is a term for whatever calculated abomination that results. Excluding MI altogether. Well, to the extent that the cash and debt's are in equal proportions in both the parent and sub, that might be the best option to get to the most accurate 'quick' estimate of the combination's EV (since the cash and debt would cancel out). But again, these are questionable assumptions, and what good is a combined EV if the companies are in different industries and the ratio is constructed in that (a+b)/(x+y) way? The safest way, in my view, is to first ask, what is it you're exactly trying to calculate, why, and then use a DCF to isolate the cash flows relevant to the stakeholder to which they matter and value those using current market values and projections.

Not to belabor the discussion, but another interesting complication arises from the debt subordination structure. Let us assume, for example, A owns 51% of B. B has little cash, assets and equity but a lot of debt. A by itself has no debt. In that case, 100% of B's debt would be consolidated onto the parents books. So now if you look at the parent, it looks like it has a ton of debt. Is this debt real? Consider the situation in which B goes bankrupt. B's debt holders will normally only have a claim on B's assets – NOT A's (if A structured the deal intelligently). So in that case, despite a lot of debt showing up in the consolidated A's financials, it is technically not something A's shareholders should have to worry about too much. Their exposure would be to the extent of their EQUITY investment in B. At worst they'll lose what they invested – not more. This "loss isolation" principle is basically how PE (private equity) funds operate and also where they derive a lot of their value – if one entity goes belly up, the debt holders do not have claim to the other investments or assets of the PE fund - usually only to those assets secured in the entity that went bankrupt. The PE fund takes a loss on the equity, which was small relative to the EV of the overall investment, shrugs, and moves on.

Thus one might even reasonably ask, what is the point of calculating EV for a company that has consolidated controlling interests in other companies, especially when large amounts of debt are involved? Assuming you have to, so what is the right way to do it? Well, again it depends on what exactly you are trying to do. Why do you want to calculate this EV? If it is for getting valuation ratios in a comp table, it would be better to use pure plays. Else use a DCF to get the most accurate estimate of the relevant cash flows to the relevant stakeholders. There is no substitute for digging into the footnotes and historical filings to figure out or estimate what assets belong to whom. Certainly, a rote answer like EV=Mkt. Cap + MI +Debt – Cash might suffice in an interview, but I would hazard the real answer is a little more complicated.

Sep 26, 2007 - 12:41pm
Bracketracer:
Minority interest is part of the enterprise value. It could be thought of as the minority ownership in the company. Since you're trying to find the total value of the company(EV), then it clearly must be added in.

If you get a chance to take Business combinations and consolidations while in school, do it.


This is wrong. Minority interest is NOT part of the enterprise value. EV is the market value of equity and net debt.
Back to school for you
nystateofmind:
when calculating Enterprise Value you're trying to find the total value of the company. Another way of thinking about it is what would you have to pay to acquire the company (acquisition value)? Thus, you need to include all minority interests in the company.

This is wrong. What you have to pay to acquire the company is the equity value (plus any premium to induce the owners to sell) â€" you do not need to include all minority interests in the company
napoleon:
usually you are trying to find the total value of the business, you should realize that any common share or equity analysis should then also reflect the minority interest adjustment (the equity value leftover isn't all yours, some goes to the minority interest holder). Usually just a rounding error, so doesn't matter. Matters only when minority interest begins to make up a big portion of the company

This is right but has nothing to do with the original question. The profit for the year is not the bottom of the income statement â€" it’s the profit attributable to equity holders.
wiseguy:
Why do we add back the minority interest when calculating the Enterprise value?

You don’t add minority interest when calculating EV, you do it when calculating adjusted EV. This is to ensure that the numerator and denominator are consistent when calculation comps. Enterprise Value metrics are used to compare companies where you don’t want the comparison to be distorted by different capital structures. Because of that, any multiple where the denominator refers to a line below EBIT (operating profit) is meaningless. For the same reason, any comparison using equity value (market cap) to compare numbers above EBIT is also meaningless.

In the consolidation of companies, you bring in 100% of the results of controlled companies. If one or more of these companies has minority interests, you need to either adjust the results (reversing out the share or revenue, costs, etc) to reflect the part of the company that does not belong to you (adjusting the denominator) or to add the value of the minority to the EV (adjusting the numerator). Of the two methods, the latter is easier â€" which is why is the most common.

For the same reason, you need to adjust for associates and investments if you are looking above the Operating Profit line.

Sep 26, 2007 - 1:34pm
John Mack:
Bracketracer:
Minority interest is part of the enterprise value. It could be thought of as the minority ownership in the company. Since you're trying to find the total value of the company(EV), then it clearly must be added in.

If you get a chance to take Business combinations and consolidations while in school, do it.


This is wrong. Minority interest is NOT part of the enterprise value. EV is the market value of equity and net debt.
Back to school for you

Wrong....

Enterprise value (EV), Total enterprise value (TEV), or Firm value (FV) is a market value measure of a company from the point of view of the aggregate of all the financing sources; debtholders, preferred shareholders, minority shareholders and common equity holders.

Sep 27, 2007 - 6:39am
Bracketracer:

Wrong....

Enterprise value (EV), Total enterprise value (TEV), or Firm value (FV) is a market value measure of a company from the point of view of the aggregate of all the financing sources; debtholders, preferred shareholders, minority shareholders and common equity holders.

Sure - if you want to use Wikipedia as your reference point for financial analysis instead of actually thinking about what the purpose of a metric is for.

Feb 11, 2015 - 12:43am
jec:
wasn't this already posted a couple days back? good stuff nonetheless

same guy, double post.

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
  • 1
Sep 26, 2007 - 12:49pm

That is untrue. When going from equity value to enterprise value more than net debt is taken into account. Preferred shares and minority interest also must be included. When an acquisition occurs the acquiring company most often needs to take on the acquiring company's debt (thus simply adding a premium to the equity value is inaccurate). Yes, most acquisitions are reported based on some premium to equity value, but the company does in fact need to purchase their debt.

Feb 11, 2015 - 12:46am

MINORITY INTERESTS - clarity on definition (Originally Posted: 04/09/2012)

Hi everyone,

EV = equity (market cap) + debt (ST and LT) + minority interests - cash and cash equivalent

Saw many different definitions of minority interests. Can anyone give me a good definition and explain intuitively why it is added to other components of the equation

Thanks

Sep 27, 2007 - 6:48am
nystateofmind:
That is untrue. When going from equity value to enterprise value more than net debt is taken into account. Preferred shares and minority interest also must be included.

Yes - preference shares are classified as equity. Even if you want to take the intellectual high ground and call it debt, it's still included in one or the other.

For minority interest treatment, I'll refer you back to my previous point. What is the point of enterprise value? What is it used for?

nystateofmind:
When an acquisition occurs the acquiring company most often needs to take on the acquiring company's debt (thus simply adding a premium to the equity value is inaccurate).

Why does your point refute my point? When you acquire a company, all you have to do is buy the equity. There may be covenants that mean you have to play nice with the debt holders but you don't have to buy it unless there's an explicit clause that forces you to.

If you can really back this up then you should call up Blackstone and tell them where they've been going wrong.

nystateofmind:
Yes, most acquisitions are reported based on some premium to equity value, but the company does in fact need to purchase their debt.

No! You DON'T have to purchase the debt - it's all about the equity....
Feb 11, 2015 - 12:47am

My understanding is that when a parent company owns over 50% of a sub company, 100% of the sub's financials are accounted for in the financial statements.

Since we use Enterprise Value to create ratios with other metrics (EBITDA, Sales, etc.), and EBITDA will contain 100% of financial info from the sub (though we do not own 100%), we need to add minority interest to our Enterprise Value so our ratio is consistent with respect to the numerator and denominator. It seems pretty counter-intuitive, but since our EBITDA figures are going to carry information "as if" we owned 100% of a sub, we have to have our Enterprise Value figure also carry this weight.

Let me know if that makes sense.

Feb 11, 2015 - 12:48am

Makes sense thank tou - however if we were to use the ratio EV / REVENUE, the minority interests are not included in revenues and our ratio would be inconsistent?

I also found this way to understand it: company A owns 60% of company B (according to US law when a company owns more than 50% of another company, it has to consolidate all the financials) therefore in company A's balance sheet we see that under our assets we have 100% of company B even though we only own 60%.

Since assets = equity + liability ----> to make the balance sheet balance we have to have to add 40 of liability since we have 100 assets and 60 equity ----> 100 = 60 + 40

Therefore it's AS IF we borrowed 40 to buy 100% of company B, so treating the 40 as debt we add it to the EV.

However do generally laws in europe say that if ownership of a sub is greater than 50% then the parent must consolidate the sub's accounts? Or is it justba US law?

Thanks

Feb 11, 2015 - 12:50am
frank90:
Makes sense thank tou - however if we were to use the ratio EV / REVENUE, the minority interests are not included in revenues and our ratio would be inconsistent?

I also found this way to understand it: company A owns 60% of company B (according to US law when a company owns more than 50% of another company, it has to consolidate all the financials) therefore in company A's balance sheet we see that under our assets we have 100% of company B even though we only own 60%.

Since assets = equity + liability ----> to make the balance sheet balance we have to have to add 40 of liability since we have 100 assets and 60 equity ----> 100 = 60 + 40

Therefore it's AS IF we borrowed 40 to buy 100% of company B, so treating the 40 as debt we add it to the EV.

However do generally laws in europe say that if ownership of a sub is greater than 50% then the parent must consolidate the sub's accounts? Or is it justba US law?

Thanks

IFRS has a similar treatment, they only differ on JVs and financial investments (e.g., held for sale, held for trading bla bla).

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
Feb 11, 2015 - 12:52am
frank90:
Makes sense thank tou - however if we were to use the ratio EV / REVENUE, the minority interests are not included in revenues and our ratio would be inconsistent?

I also found this way to understand it: company A owns 60% of company B (according to US law when a company owns more than 50% of another company, it has to consolidate all the financials) therefore in company A's balance sheet we see that under our assets we have 100% of company B even though we only own 60%.

Since assets = equity + liability ----> to make the balance sheet balance we have to have to add 40 of liability since we have 100 assets and 60 equity ----> 100 = 60 + 40

Therefore it's AS IF we borrowed 40 to buy 100% of company B, so treating the 40 as debt we add it to the EV.

However do generally laws in europe say that if ownership of a sub is greater than 50% then the parent must consolidate the sub's accounts? Or is it justba US law?

Thanks

That seems an unnecessarily convoluted way to think about it. Basically the accounting rules just distort EBITDA by including amounts that don't flow up to the parent, and it just becomes quicker/easier to distort the numerator (EV) by an offsetting amount rather than to dig through and try to strip those amounts out of EBITDA, especially since a lot of companies won't report segment data that would allow you to do that.

Sep 26, 2007 - 2:20pm

Minority interest is included in the enterprise value in a market comp approach when calculating multiples to account for the fact that the subject company's operating statistic (Revenue, EBITDA, EBIT) include 100% of the affiliated companies operating result. The equity value used in the enterprise value represents the market price (minority, controlling interest) which already takes into account the fact that the company owns less than 100% of affiliated company (even though the income statement shows 100%). Rather than adjusting the subject company's operating statistic for the unowned portion, we just add the minority interest liability (which represents the unowned portion of the affiliated company's net income) to the enterprise value. The result is an enterprise value and operating statistic that represent 100% ownership in the affiliated company.

Sep 26, 2007 - 3:59pm

Long story short - the adjustment for a minority interest should be made such that you're adding back the expense associated with a minority interest in order to derive the appropriate enterprise multiple (e.g., EV / LTM EBITDA) - this is, as John Mack pointed out, necessary to ensure the numerator and denominator are consistent.

I would not recommend, however, trying to reach an "adjusted" EV that includes payments made for a minority interest, since the book value of this minority interest is not marked to market.

Sep 27, 2007 - 1:43pm

Typically if you buy 100% of the equity with say cash then you would assume the debt of the target unless the seller is forced to retire debt prior to closing. When calculating an IRR on the transaction you would include both the cash consideration and the assumed interest bearing debt as this is the total amount of invested capital that is needed to generate the cash flows of the business.

Sep 27, 2007 - 4:32pm

wow- this question is getting a LOT more drawn out than it'ssupposed to be.

I thought that minority interest is supposed to be SUBTRACTED out of Enterprise Value, because it is equity that the firm does not own - correct?

To illustrate. If i'm Coke, and I purchased 60% of Coke 2.0, due to accounting rules i'm going to consolidate our balance statements, as if i owned 100% of Coke 2.0. In truth, that minority interest of 40% is something that I actually do NOT own - hence, should be subtracted out of Enterprise Value.

Am I wrong here?

Sep 28, 2007 - 3:00am

If you are going to subtract out anything, you would subtract the 40% of Coke 2.0 financials on the I/S. This is not technically correct accounting, but occasionally a banker might like to see it this way.

Technically you add it. Much like how the operating metrics on one side are 100% consolidated, the ownership should be as well.

Think of it this way. Say I bought a new car, but I am a bit short even with financing. I let Rich Rachel go in with me and buy 40% of the steering wheel. What I (shareholders/debt holders) actually have a claim to is the car less 40% of the steering wheel, so that part of the car is not reflected in the lease (debt) or equity (down payment on the car) associated with the car. So if I add this debt and equity, I get the worth of the car less 40% of the steering wheel. To get the entire value of the car (firm value), I would have to add the part of the car Rich Rachel owns, which is her minority interest.

In other words, because Coke has over 50% of this entity, they control it and consolidate (much like I would still control all of the steering wheel). We are concerned with what the operations of the business (or horse power, etc.) is worth, so we have to add the minority interest (Rich Rachel) to get that.

Sep 27, 2007 - 8:03pm

no you add back minority interest...
as mentioned, the EBIT number already includes a portion of what you do not own. if you subtract minority interest away, you get an artifically inflated EV/EBIT multiple...

Sep 29, 2007 - 3:38am

By the way, John Mack is right on all of his points. You (John Mack) also gave a great explanation as to why Minority Interest is added back when using EV to calculate multiples (Revenue, EBITDA, EBIT multiples etc..) - thanks.

Dec 20, 2010 - 12:41pm

This may be a pretty stupid question but:

When calculating Enterprise value for Firm A.....

Is the minority interest portion of EV firm a's stake in subsidiaries / other companies or is it other companies' stake in firm A?

Thanks

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Dec 20, 2010 - 12:57pm

Minority interest is a joint venture. So if Company A and Company B work together and make Comapny X, with A owning 60% and B owning 40%, A would view it as a minoirty interest on its books.

Dec 20, 2010 - 1:02pm

So when calculating A's EV, minority interest would equal 60% of company x. How would company b's EV be affected? Would the 40% stake be built into its market cap valuation and not its minority interest? A stake less than 50% isn't a minority stake right?

Dec 28, 2010 - 12:22pm

you could refinance the debt or you can keep it on your balance sheet if there's no limitation to that debt (i.e. bond issuance where there was a clause that in the case of changed hands, the issuer might repay everything- forgot what the technical term for this was ). However, most of the time in models, if the acquirer has a lot cash, chances are you will just pay off all the debt unless the interest rate was REALLY low

Dec 28, 2011 - 12:24pm

Sorry to bump this old thread, just have a smilar question.

I understand that the idea is for the ratios like EV:EBITDA and EV:Sales to be apples to apples and since sales and EBIDTA will count as if the company has100% ownership in the sub, then we must add that back to the numerator. My question is, why isn't 100% ownership of the sub also already accounted for in the equity component of the EV formula?

Jul 14, 2014 - 12:25am

wannabe2013:

Sorry to bump this old thread, just have a smilar question.

I understand that the idea is for the ratios like EV:EBITDA and EV:Sales to be apples to apples and since sales and EBIDTA will count as if the company has100% ownership in the sub, then we must add that back to the numerator. My question is, why isn't 100% ownership of the sub also already accounted for in the equity component of the EV formula?

In my opinion, the confusion here stems from the definition of "Enterprise Value." The last sentence seems to me that what you want to find out is the market value of the firm's or enterprise's assets. If this is what you are looking for, then this is equivalent to looking at the right-hand-side of the "market value" balance sheet, which is equal to the market value of the firm's liabilities, preferred shares, and common equity. minority interest is a result of consolidation accounting and this is irrelevant from the market's standpoint. Specifically, if a Firm A owns 95% of Firm B's shares and that Firm B's equity is worth $100 million, then the market will assign $95 million to Firm A for its ownership in Firm B. So, you are right, that the $95 million value is reflected in the market capitalization. The book value of minority interest reported on the financial statements has absolutely no bearing on this value.

In the above example, for comparability to other figures for multiples purposes, what is happening to the "Enterprise Value" calculation is that the value of Firm B is based on 95% market value (from the market cap) and 5% Book Value (from the mionrity interest line item). Essentially, this is just another mixing of MV and BV for whatever reason - just like people typically using the BV of debt in lieu of trying to find the debt's MV, specially when the firm is investment grade.

Dec 30, 2011 - 12:34pm

Not sure if I understand your question, but it would be because you want to count the Enterprise value of the sub, not the equity value of it. Although if the sub isn't consolidated, its top line figures wouldn't be either so I'm not sure what you're getting at.

Dec 30, 2011 - 1:12pm

if EV = Equity value + Debt - cash + minority interest

and minority interest is 30%...then the other 70% is located in equity value, right? But if we assume that 100% of the sub was acquired, how does that equity value not count the entire 100%?

May 27, 2013 - 2:22pm

Dear Wannabe2013, et al

Your EV formula is wrong. It should be EV = Em + Dm (approx as Long Term Debt) - Excess Cash.. .that's it. Em and Dm is Equity market and Debt market (mind you, Dm ~ Long Term Debt in books for solvent companies)

You never include the minority interest on your valuation, because (1) minority valuation is at book value and (2) you do not want to add it simply because you do not own it!!!!

By way of example, say company X has an ownership of say 55% in another company Y (and both are publicly traded), then it still continues to be the formula outlined above.

However, when you do your own fundamental valuation (to arrive at your unbiased personal estimate of EV), you do the following (because the 55% interest in company Y would be "Fully" consolidated by accounting rules):

EV(of X) = DCF of FCF's - EV(of Y) x 45% (you net out the part of Company Y's EV that you don't own).

The above gets more interesting when the EV(of Y) is not traded (like Verizon Wireless, which is a joint venture which does not trade separately and for which there is no "EV(of Y)" to grab from. For those cases, you have to estimate the EV(of Y) through another nested DCF of FCF's (this time using FCF's only for company Y) so you can subtract it proportionally in lieu of not having EV(of Y) from market quotes.

Discussions about these type of things in public boards are great, but the advice often cleansed/sanitized.....

I hope this helps democratize learning in Finance (a field often left to confusion, so people who claim to know more wind up wasting your money ... so don't let them!!!)

Happy valuation hunting... Cheers!
Angelo

P.S. If you want the valuation of the equity portion only, simply take your calculated EV(of X), net it with whole debt and then subtract only 45% of Ey (the equity market of Company Y).

That is Em of X = EV(of X) - LTD - Ey x 45%, where Ey is the market cap of company Y and Em of X is the market cap of company X

May 27, 2013 - 2:37pm

A couple of things from my post above:

1. I assumed that the companies do not have Excess Cash (in other words, while I typed, Excess Cash = 0), but the above formula (where doing it via valuation) should have a - Excess Cash in it

2. I meant to say above: "Discussions about these type of things in public boards are great, but the advice often is left uncleansed/unsanitized, so be warned..... "

3. Another thing... one poster above mentioned using P-to-B multiples to remove the minority interest (at market value) from the total valuation. That is a great post. In fact, for Verizon Wireless (as there is no value in market) you can do the following (assume X is Verizon Comm and Y is Verizon Wireless):

Change Em of X = EV(of X) - LTD - Ey x 45% for
Em of X = EV(of X) - LTD - Minority_Interest x P-to-B (use P-to-B of a Ver Wir competitor, for ex Sprint)

May 27, 2013 - 2:44pm

So, to answer the original posted question "Why do we add back the minority interest when calculating the Enterprise value?" by wiseguy, the answer would then be:

"NO, you don't add minority interest to it. EV is only what the value is, by way of ownership, of that company (so you can't add to it what you don't own... is not even consistent because minority interest is book value and EV is market value... don't add it".

For more, see my posts directly above

Feb 10, 2015 - 10:31pm

I wonder if this John Mack person from 2007 got it wrong [which is funny b/c this is one of the first Google results for "minority interest added to EV" search] by saying that minority interest is part of your company's Market Cap already. I always thought minority interest did NOT refer to the % that someone owns in YOU, but that it refers to a sub-50% ownership into your subsidiary with which you have to consolidate financial statements.

Case in point - 2 public companies (say both are $100M market cap), one owns 55% of the other. So the owner's EV is $100M-Cash+Debt+$45M (ie if someone buys this "owner", we're assuming they're buying out both entities).

The smaller company's EV is merely $100M-cash+debt.

Take a real-life example of EMC / VMware (EMC owns like 80%, both are public). If you want to calc the real Ent V of EMC, you take all of EMC's shares (whose valuation imply that they own 80% of VMW), plus net debt, and then you add the minority interest of VMW (which to be fair at book value means absolutely nothing) which CANNOT BE REFLECTED in EMC's market cap.

Can an intelligent person opine?

Jul 14, 2014 - 12:42am

fin geek - the important thing is that the market will only assign $95M of B's market value to A's market value. So there's still that $5M missing somewhere. And I agree taking BV is really stupid, but that's what theory tells us (check out EMC's noncontrolling interest of VMW on balance sheet, it's insane).

I just find it amazing that the confusion stems from DEFINITION of minority interest. Some kid from 2007 above thought it was the % of your company that's owned by some other company, and thus went on to say "well, market cap takes credit for 100% of you so no need to add minority interest". But MI is really the '% of one of your subs that you don't own (provided you own >50% of that sub). Incredible.

Jul 15, 2014 - 1:50am

midnight_oil: I don't think that $5 million is missing from A's value because the $5 million was never there to begin with. The only reason why MI is on the books is because of consolidation accounting. Think of a situation in which the sub is completely independent with no recourse to the parent. In that case, if you own 95% of the equity of the sub and the sub pays dividends, you get 95% of the dividends paid by the sub. You don't get 100% of the dividends and have to give back 5% to the other shareholders.

Also, the theory doesn't tell us to use BV. BV is used for convenience or convention or both. The theory actually tells us that all the components of EV should be calculated using market value terms. It is just convention/convenience that we use, say, BV of debt instead of MV of debt for investment grade companies.

Jul 16, 2014 - 6:11pm

Yeah, by 'missing' I mean that when some company Z wants to go out and buy you (and your subsidiaries), they'll be modeling your P&L as though you own 100% of them since they're 100% consolidated on your books. It's not super practical for them to start dividing it all up into the exact stake you actually own. But if their purchase price only accounts for 95% of some subsidiary that you're consolidating 100%, you sort of need to make the assumption that Z will buy out the 5% that's owned by someone else - at least to calculate the EV/Rev and EV/EBITDA multiple (your cash flows/NI should be ok since they get adjusted by a Net Income to Noncontrolling Holders line or smth like that).

btw I should've said "practice would tell us to use BV", you're right. But you know what I mean. It's stupid and yet it's the most practical way (unless your sub is public like VMware and you can actually calculate mkt cap)

Aug 15, 2014 - 5:15am

That's a tricky question. Most of the guys above are right.
It depends on how do you view this problem
Just think like this, if you wanna value a company A, and Company owns 55% equity of company B,what will be the enterprise value? It should be:EV=Mkt cap+debt-cash+ minority interest. Why should we add minority interest here? Because Company A consolidate the I/S and B/S. If you discount the FCF it creates, that will reflect the value of operating assets of company A and B(because the revenue is combined).
EV=Mkt cap+debt-cash+ minority interest is correct under this situation, but please remember, that's not the price you should pay to acquire company A, That's the price you need to pay to acquire Company A and B without any premium!
let's back to the original question here.If you just wanna buy company A, the price will be EV=Mkt cap+Debt-cash-minority interest(45%)
If there is any mistake, please help me to point out. thx

Sep 1, 2014 - 5:00pm

Hi Eric,
Perhaps this will help. It is confusing because, though not hard, it can be non-trivial.

If you value company A via fundamentals and company A owns 60% of company B (so it consolidates) you say:

MarketCap A=DCF of FCFA_Comb - D_Comb + ( Debt of B ) x (1-60%) (where Comb stands for consolidated)

If you value company A via fundamentals and company A owns 30% of company B (so it does not consolidate) you say:

MarketCap A=DCF of FCFA (adjust FCF to before B's earnings) + Market Cap of B x 30%

If you value company A via fundamentals and company A owns 30% of company B (so it does not consolidate) but company B is not trading (so you can not look up Market Cap of B), then you could approximate it by doing:

MarketCap A=DCF of FCFA (adjust FCF to before B's earnings) + (comparable P-to-B) x B's Min_Int x (30%)/(1-30%)
OR
MarketCap A=DCF of FCFA (adjust FCF to before B's earnings) + (comparable P-to-E) x B's earnings reported in A
OR
MarketCap A=DCF of FCFA (adjust FCF to before B's earnings) + [(comparable SalesX) x B's Sales - Debt of B]x30%

OR, choose your favorite value multiple and make sure you add something consistent

Thus:
When you see Enterprise Value on Bloomberg, there are two cases (assuming Debt market is close to Long Term Debt, which we state here as "Debt of A" or "Debt of B"):

- when fully consolidated (as in case for 60% ownership ex), is equal to

Market Cap of A+ [D_Comb - Debt of Bx(1-60%)] - ExcCash adj
OR
Market Cap of A+ D_Comb - [EV of B]x(1-60%)xCapStruct%] - ExcCash adj

where ExcCash adj=Exc Cash of Comb - % of Exc Cash not owned by A. Also, because D_Comb is Debt A + Debt B (and your company A is only liable for Debt B x 60%) you take out 40% of it which belongs to someone else

- when not fully consolidated (as in case for 30% ownership ex), is equal to

Market Cap of A + DebtA - ExcCash ------------> Note there is NO adjustment

Why is Market Cap, the Market Capitalization of A, already ok? Because, those valuing A did a valuation (pick your fave formula above) and it already reflects the 100% owned by A and what A owns fractionally from anybody else.

Do we subtract Min Interest in the 60% case? NO, NO... minority interest (acquisition or purchase method, it doesn't matter) is Net Assets of B x % not owned. You'd be subtracting something irrelevant that looks like equity book.

Comments reg Bloomberg: I believe Bloomberg analysts (or a savvy group of programmers) do the adjustments above for the case of fully consolidated b/c I've estimated EV manually and have been in line with Bloomberg results

I've seen bankers make countless mistakes around this topic, so I am not surprised by the interest in this thread. Worth talking/writing about it, as in this way, you'll be better able to see through the emperor's clothes.

Kind Regards,
Angelo

Sep 1, 2014 - 5:15pm

Sorry, I have to correct my earlier post as WSO didn't have the edit option:
Perhaps this will help. It is confusing because, though not hard, it can be non-trivial.

If you value company A via fundamentals and company A owns 60% of company B (so it consolidates) you say:

MarketCap A=DCF of FCFA_Comb - D_Comb + ( Debt of B ) x (1-60%) (where Comb stands for consolidated)

If you value company A via fundamentals and company A owns 30% of company B (so it does not consolidate) you say:

MarketCap A=DCF of FCFA (adjust FCF to before B's earnings) - Debt A + Market Cap of B x 30%

If you value company A via fundamentals and company A owns 30% of company B (so it does not consolidate) but company B is not trading (so you can not look up Market Cap of B), then you could approximate it by doing:

MarketCap A=DCF of FCFA (adjust FCF to before B's earnings) + (comparable P-to-B) x B's Min_Int x (30%)/(1-30%) - Debt A
OR
MarketCap A=DCF of FCFA (adjust FCF to before B's earnings) + (comparable P-to-E) x B's earnings reported in A - Debt A
OR
MarketCap A=DCF of FCFA (adjust FCF to before B's earnings) + [(comparable SalesX) x B's Sales - Debt of B]x30% - Debt A

OR, choose your favorite value multiple and make sure you add something consistent

Thus:
When you see Enterprise Value on Bloomberg, there are two cases (assuming Debt market is close to Long Term Debt, which we state here as "Debt of A" or "Debt of B"):

- when fully consolidated (as in case for 60% ownership ex), is equal to

Market Cap of A+ [D_Comb - Debt of Bx(1-60%)] - ExcCash adj
OR
Market Cap of A+ D_Comb - [EV of B]x(1-60%)xCapStruct%] - ExcCash adj

where ExcCash adj=Exc Cash of Comb - % of Exc Cash not owned by A. Also, because D_Comb is Debt A + Debt B (and your company A is only liable for Debt B x 60%) you take out 40% of it which belongs to someone else

- when not fully consolidated (as in case for 30% ownership ex), is equal to

Market Cap of A + DebtA - ExcCash ------------> Note there is NO adjustment

Why is Market Cap, the Market Capitalization of A, already ok? Because, those valuing A did a valuation (pick your fave formula above) and it already reflects the 100% owned by A and what A owns fractionally from anybody else.

Do we subtract or add Min Interest in the 60% case? NO, NO... minority interest (acquisition or purchase method, it doesn't matter) is Net Assets of B x % not owned. You'd be subtracting or adding something irrelevant that looks like equity book.

Comments reg Bloomberg: I believe Bloomberg analysts (or a savvy group of programmers) do the adjustments above for the case of fully consolidated b/c I've estimated EV manually and have been in line with Bloomberg results

Dec 5, 2014 - 4:22pm

ericyuan: You have an error: if you just want to buy company A without its share of company B, the EV is Mkt cap + Debt - cash - majority interest (55%). If you want to buy company A including just its share of company B, the EV is Mkt cap + Debt - cash. In no case do we get what you've written: Mkt cap + Debt - cash - minority interest (45%).

Dec 5, 2014 - 4:23pm

ericyuan: You have an error: if you just want to buy company A without its share of company B, the EV is Mkt cap + Debt - cash - majority interest (55%). If you want to buy company A including just its share of company B, the EV is Mkt cap + Debt - cash. In no case do we get what you've written: Mkt cap + Debt - cash - minority interest (45%).

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