Why is minority interest added to enterprise value? Anchor your answer in consolidation accounting and the consistency of EV/EBITDA.
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The answer
Minority interest gets added to enterprise value because of how consolidation accounting works. When a parent owns more than 50% of a subsidiary, accounting rules require it to fully consolidate 100% of that subsidiary's revenue and EBITDA, even if the parent only owns, say, 80%. So the denominator in an EV/EBITDA multiple includes the subsidiary's entire EBITDA.
For the multiple to be apples-to-apples, the numerator must reflect the claims of all capital providers on that full EBITDA, not just the parent's share. If I didn't add the noncontrolling interest, my enterprise value would only represent the 80% we own while the EBITDA reflected 100%, artificially depressing the multiple and making it useless for comparisons.
I add that minority stake at its market value when possible, or book value as a proxy, so that EV matches the scope of consolidated EBITDA.
Enterprise value bridge
| Equity value | 800 |
| + Total debt | 380 |
| − Cash & equivalents | (150) |
| + Minority interest | 20 |
| + Preferred stock | 15 |
| Enterprise value | 1,065 |
Also asked as
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- Explain why equity investments are subtracted from EV while minority interest is added, and show how the two follow from the same consistency principle.
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- A parent (equity value $5,000M, net debt $1,500M) owns 70% of a listed subsidiary whose market cap is $2,000M; consolidated EBITDA is $800M including $300M from the sub. Compute EV/EBITDA (a) correctly with NCI at market, (b) incorrectly with no NCI, and (c) on a fully deconsolidated basis, and reconcile why (a) and (c) can both be defended but (b) cannot.
- DistressCo: 30M shares at $1.80; $500M secured debt trading at 90; $700M unsecured notes trading at 40; cash $120M ($40M restricted); pension deficit $160M, tax rate 25%; EBITDA $130M. Compute market-value EV and EV/EBITDA, then compute the same at face value of debt, and explain what the gap between the two multiples represents and which class of debt is likely the fulcrum if going-concern EV is $850M.
- You are comping an IFRS 16 reporter (all leases capitalized) against a US GAAP retailer whose operating leases are expensed through EBITDA. Their headline EV/EBITDA multiples are 8.0x and 6.5x. Explain precisely why these are not comparable, and lay out two internally consistent ways to fix the comparison.
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The rest of this topic
The enterprise value bridge