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Treatment of Minority Interest PDF
Treatment of Minority Interest PDF
Treatment of Minority Interest PDF
In Step 1, 2 & 3: While calculating Free Cash Flows & Continuing Value, for a consolidated entity, Minoritys
contribution is already accounted for (despite Minority Interest being a below the line item). Implying,
WACC automatically includes Minority Interest.
In Step 4 & 5: Now, Value of Operations includes the Minoritys share as well. Entailing that, Enterprise
Value measures 100% of Parent & 100% of all Subsidiaries.
In Step 6: Thanks to the Consolidated financials, the Minority has been Automatically Valued and now
must be reduced from the Enterprise Value to derive the Enterprise Value attributable to the Parent alone.
But note, that the Fair/Intrinsic Value (and not Book Value) of Minorities must be reduced from it, else you
risk undervaluation! To value Minoritys Interest, you may choose a Comparable P/B multiple & then
multiply it by Book Value of the Minority (i.e. Minority Interest in Balance Sheet) or, use a Comparable P/E
multiple & multiply it by Minority interest in the Income Statement. Or use the DCF for each such Subsidiary.
Finally: Other Non-equity Claims (Debt, Preference Capital etc.) must be subtracted to derive Equity Value
attributable to the Parents Shareholders.
? While calculating EV under Comparable Valuation: Why are Excess Cash & Cash
Equivalents subtracted? Should they be considered at Market or Book Value?
Such items are treated as Cash or Near cash and hence can be used to pay down debt.
What is Excess Cash and why not simply use Total Cash?
Excess Cash is defined as Total Cash (in Balance Sheet) Operating Cash (i.e. Minimum required cash)
This is because, operating cash is required to sustain operations (working capital) and manage
contingencies (anomalies such as strikes, lockouts etc). If Total Cash is used to pay down debt, the company
will have nothing left for working capital requirements and contingencies! Secondly, Cash at Book Value or
Market Value is the same i.e. Always at Present Value!
Treatment of Cash Equivalents: Near Cash items must include investments that are actively traded,
available for Sale and held to maturity. Being non-critical in most cases, valuing petty investments is not
feasible. The process of determining fair value of such investments may involve valuing hundreds or even
thousands of investments and must be strictly left to Purists! Hence we recommend using Book Value.
Note: It must be kept in mind that the resulting valuation multiple will be used for a 100% Consolidated
company! If Valuation of a Parents contribution alone needs to be measured, Minority Interest (at Market
Value) must be subtracted from the numerator (i.e. Enterprise Value) while the denominator must also
show Parents share alone (i.e. Minoritys stake must be proportionately subtracted from Sales, EBITDA
etc.)
? But why is the treatment of Equity Investments different while performing a DCF
Valuation as against the Comparables Approach?
The so called discrepancy in valuation treatment is an illusion!
This is an altogether different subject and is dealt here.
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