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minority interest and valuation


Mohammed Al Alwan
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I have a question on the impact of Minority interest (MI) on valuation.

 

When comparing a company with MI and this MI is big as pct of EV vs a company with no MI based on multiple say EV/EBIT or EV/EBITDA what would you do. A friend suggested that you strip out MI from both Numerator and denominator and compare them apple to apple. I disagreed and my argument was that I already subtract MI when I calculate the EV a the end to arrive at the fair equity value .So,what is the point of this adjustment!!

 

second point, is the MI is an accounting figure and not based on market value. what would you do for companies with MI would you strip it out as suggested by our friend or is there a better alternatives as this use of accounting value would make company look cheaper.

 

 

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Since EV is capturing the market value of stock and Minority Interest an accounting figure, or book value, you have a disconnect. You need to either strip out the Minority Interest from EV along with the associated impact to EBIT, EBITDA, earnings or FCF, whichever you use since the company only has "rights" to a portion of it, as your friend suggested; or, convert the Minority Interest to its Market Value (which seems simpler).

 

 

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I don't think you need to strip out MI from EV because it isn't part of it to begin with when you calculate it the usual way: when you take the market value of debt + market value of equity you are already ignoring the market value of the minority interest. So the only thing you need to do is strip the earnings attributable to the minority interest away to get a clean EV/EBIT(DA) number.

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Thank you Hielko

actually if you calculate EV you can either include or exclude MI, if you opted to include or exclude you  need to make sure  both Numerator and denominator are apple to apple . My question was what is the best way to tackle it and it seems that the best way is to exclude MI from the calculation in both Numerator and Denominator.

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The other relevant question is when the MI included.  If recently, then the MI is calculated at fair value and tested for impairment over time.  Depending upon how complicated the MI is it can be tricking pulling the data out as in most consolidating statements are not provided.  If you can provide more details on the MI you are looking at (is it one MI or multiple and do you have the entity statements the MI is applicable to?) we can give you better guidance.

 

Packer

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Thank you Packer16

 

actually I am looking at multiple MI for a petrochemical company SABIC AB Equity (Bloomberg Code).unfortunately the accounting standard don't use market to market for MI but use book value.

 

my concern on MI is only if you do look at Multiple alon,however,if your doing some DCF type of analysis then its not an issue as you can subtract it from EV to arrive at equity value.

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