Enterprise Value Below Equity Value, Explained

The 15% stake is presumably accounted for under the equity method (or at fair value through OCI), but crucially the associate’s EBITDA is not consolidated. Therefore, I subtract the market value of the associate from EV because it is a non-operating asset. Even if the carrying value on the books is different, I use the fair value ($400 million) for the bridge. So EV becomes $1.8 billion − $400 million = $1.4 billion.

A negative EV can occur (if the cash and non-operating assets exceed the operating value), but here EV is positive $1.4 billion. The equity value remains $2 billion because the market values the company above the sum of its net operating assets and the associate; the difference could reflect growth expectations or intangibles not captured in the bridge.

The negative net debt simply tells me the company holds more cash than debt, not that it is cheap.

The EV of $1.4 billion still represents the value of the core operations. If the associate is publicly traded, I would consider whether its value is already embedded in the share price via the equity value. In theory, the equity value should reflect all assets, including the associate. So subtracting it is necessary for the core EV. The resulting EV can then be paired with core EBITDA to get a clean multiple.

Follow-up pressure:

• How would you treat the associate if the company had a 25% stake and accounted for it under the equity method, but the associate’s fair value was not readily observable?
• If the associate was a former subsidiary consolidated and then deconsolidated, would your treatment change?
• Why might an analyst add back the associate’s dividend income to EBITDA? Would that then be consistent with subtracting the associate from EV?