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Wrong!
Here's the Problem: That Equity Value of $390 already reflects 70% * $100.
In other words, it already includes the ownership percentage in the Majority-Owned Company times the
Majority-Owned Company's value.
Without that stake, the Parent Company's Equity Value would be $320 instead.
So as it stands, this Enterprise Value of $540 also includes the value of that 70% stake.
BUT
EBITDA includes 100% of the Majority-Owned Company's EBITDA, because accounting rules state that
the statements should be consolidated -- you literally add together each item 100% - when the
Parent Company owns over 50% of another company.
Let's say the Majority-Owned Company had $15 in EBITDA.
The Combined Company's EBITDA would NOT be $63 + $15 * 70% = $73.5.
It would actually be $78 ($63 + $15)!
So Enterprise Value reflects 70% of the Majority-Owned Company, but EBITDA reflects 100% of the
Majority-Owned Company's EBITDA.
Theoretically, you could fix this by subtracting 30% of the Majority-Owned Company's EBITDA...
But in real life, companies don't disclose enough information for you to do this.
They only show the Majority-Owned Company's Net Income - not enough to calculate EBIT or
EBITDA.
So instead, we add 30% * $100 to Enterprise Value -- representing the portion the Parent Company
does NOT own -- to make sure that BOTH Enterprise Value AND EBITDA reflect 100% of that other
stake.
The equation then becomes:
Enterprise Value = Equity Value + Debt -- Cash + Noncontrolling Interests
Enterprise Value = $390 + $200 -- $50 + $30 = $570
Summary:
The key concept is "Apples to Apples" comparison -- that's the easiest way to think of Equity Investments
(Associate Companies) and Noncontrolling Interests (Minority Interests).
Equity Value will always implicitly reflect the value of the Parent Company's stake in other companies.
If that stake is 70% and the other company is worth $100, Equity Value therefore reflects 70% * $100, or
$70.
If that stake is 30% and the other company is worth $200, Equity Value therefore reflects 30% * $200, or
$60.
And that's fine.
The problem, though, is that due to accounting rules (under both US GAAP and IFRS), the Parent
Company does NOT actually reflect 70% or 30% of the other company's financials on its own Income
Statement... until the adjustments to Net Income at the very bottom.
Instead, accounting rules say: "Hey, you have to take an 'all or nothing' approach and either add
100% of the other company's numbers to your own, or add 0% of the other company's numbers...
and then adjust for the percentage that you do actually own at the bottom of the Income
Statement."
And that creates problems for valuation multiples, such as EV / EBITDA, EV / EBIT, and so on...
Since Enterprise Value reflects the 70% or the 30% you own in another company, but EBIT or
EBITDA reflect 0% or 100% ownership.
To fix it, you adjust Enterprise Value to make sure IT also includes 100%, or 0%, of the partially
owned company's value.