When to add back pension obligation to EV?

flipcup's picture
Rank: Orangutan | banana points 318

So the usual "guide math" for EV is you do Equity + Net Debt + minority interest - JVs + Leases + Pension + "Financing-ish" Obligations (environmental reserves, etc.), which is pretty straightforward. However, in practice, how often do you guys actually add back pensions?

The reason I'm hesitant is that for every other adjustment, there's a corresponding "denominator" adjustment that makes it make sense when doing EV / EBITDA* ratios. We add debt, but don't count interest expense (the "I" in EBITDA); when we do minority or JVs, the denominator, through consolidation, makes everything apples-to-apples. Similarly, at my bank at least, when we add back operating leases (rent expense x 8), we usually only look at EBITDAR ratios to keep things apple-to-apples: if you claim operating leases are really sources of financing, you shouldn't think of rent expense in the denominator as operational and thus should use EBITDAR.

For pensions, though, I've seen a lot of guys play fast and loose, adding pension liability or net underfunded status to EV but not really doing EBITDAP (or, "EBITDABOPEB") in the denominator. This invariably leads to high (and I'd argue, inflated) EV / EBITDA multiples for companies with significant pension liabilities, such as Europeans or unionized companies. What are your thoughts on this from both a technical and practitioner's point of view?

Comments (3)

May 26, 2017

If you add back pension you need to use EBITDAP on the denominator....it's apples to oranges if not.

How often do I actual pull.....only when my MD tells me to...ha. In all seriousness it only really matters / is worth the extra effort if you're dealing with companies with large underfunded pension obligations (i.e. auto OEMs, airlines, etc....). It's not worth it for many "new economy" type companies in my opinion.

May 27, 2017

If you add pension liabilities to debt then you should just add back the pension interest costs to EBITDA since the pension expense also includes current service cost which is not related to the funded status i.e. pension liability or asset. But pension accounting is too messy to bother with in too much detail.

May 27, 2017
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