why doesn't equity value take into account 100% minority interest
this is from BIWS: "Let’s say that your revenue is $100, and you own 70% of another company that has $50 in revenue. On your statements, you show $150 in revenue because you consolidate 100% of the statements (see the Accounting section of the guide).
But equity value, by itself, only reflects the 70% of the other company that you own. An Enterprise Value / Revenue multiple would be wrong because we would have 100% of the other company’s revenue, but only 70% of its value. As a result, we need to add the Noncontrolling Interests line item that reflects the 30% we do not own – that way, we’re including 100% of the other company’s value in Enterprise Value."
Is this example, why does equity value only reflect 70% and not the 100%?
equity value would be overvalued if that was the case. Taking that 30% of the sub not owned by the parent into account just doesnt make sense. As an investor, why would you base your investment decision on something not owned by the business.
If a business is worth $100, I own 70% of it, the portion I own is worth $70. Now think of me as a business rather than an individual. As a business, I can sell shares of my own company to investors, such as yourself. Now, right off the bat, my business would be worth atleast $70 because of my 70% interest in the other company. If my business operations is worth $100 alone and I own 70% of the other company, my business is worth $170. If I issue shares representing 10% of my company to you, you would pay $17 (equity value). You wouldn't pay me $20 (based on on $100 for my business and $100 of my subsidiary) because $30 of the $100 of value generated by the sub goes elsewhere.
"Taking that 30% of the sub not owned by the parent into account just doesnt make sense."
I understand that concept, but on their financial statements, they record revenue as if they owned 100% of the company, so why isn't that reflected in equity value?
Because what you don't own is not your equity...
If that's the case, then why does your ebitda reflect 100% ownership but your equity value reflect only 70%? Isn't equity value calculated from the discount of future values of free cash flow?
The 100% reflection in the financial statements is simply an accounting nuance. Thats why at the bottom of the income statement the net income attributable to minority interest is subtracted out to arrive at net income available to parent company shareholders.
I did not realize minority interest was subtracted from net income, thanks
No "minority interest" itself is not subtracted. The net income attributable to the minority interest is subtracted. If net income of the combined parent and sub is 100, you would have an additional line subtracting out 30 (30% minority interest x net income); leaving you with 70 of net income attriubalte to common shareholders of the parent.
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