Adjusting Equity for Minority Interests in P/B Calculation

[west]

Just curious, does anyone know if you're technically supposed to adjust Total Equity (or Market Cap for that matter) for Minority Interest in a P/B calculation?  I know for calculating EV you're supposed to add the carrying value of the Minority Interest times an appropriate P/B multiple for the industry (assuming you don't know anything more about the Minority Interest than what's given), but I'm not sure what adjustments, if any, should be done for P/B.

 

Thanks in advance!

[cobafdek]

I believe the answer is yes, that you should adjust Total Equity as an outside passive investor.  As an outside passive VALUE investor, it may be even more imperative, since the resulting values will be more conservative, just as your adjusting the EV for MI makes EV/EBIT more conservative.  I see this adjustment as similar to netting out goodwill and intangibles, and thus using TBV to compare to P.

 

This question may not have arisen had it not been for FASB in 2008 sort-of-arbitrarily moving Minority Interest from the limbo Mezzanine part of the  balance sheet (where it seemingly ranked closer to Liability) into Shareholder Equity.  All the Graham and Dodd editions came out before 2008, so their calculation for Common Equity is "Total Assets, less goodwill and less intangibles, and less all claims prior to common."  (However, a cursory check in my 4th and 5th editions of Security Analysis shows no discussion of this Minority Interest problem.)

 

Since exceptions are possible in the art of valuation, an investor who views a company as a going-concern with solid earnings may choose not to adjust out Minority Interest, if the subsidiary is meaningfully contributing to earnings.  For the same reason, he may not fully deduct goodwill and intangibles if he has strong evidence these are not impaired.  On the other hand, an investor who believes the company is more likely to liquidate will stick closer to adjusted TBV.

 

(Not sure if this kind of answer is what you're looking for, and - major caveat - I have no formal training in accounting or security analysis.)

[Hielko]

I think you should always adjust for a minority interest, doesn't matter if the sub is contributing to earnings or not. Especially if it is meaningfully contributing to earnings you should make an adjustment since not all earnings would be attributed to equity holders.

 

For a P/B ratio the adjustment is easy since you can simply take the book value of the minority interest.

[west]

Thanks guys.  So I guess I'm wondering, how do you make the adjustment?  Total Equity typically does not include the Minority Interest book carrying value already.  Or do you make the adjustment on the Market Cap side of the P/B calculation?

 

I'm not 100% sure any adjustment is necessary since Market Cap and Total Equity just reflect the equity interests of a firm.  I'm not positive though...

[topofeaturellc]

Thanks guys.  So I guess I'm wondering, how do you make the adjustment?  Total Equity typically does not include the Minority Interest book carrying value already.  Or do you make the adjustment on the Market Cap side of the P/B calculation?

 

I'm not 100% sure any adjustment is necessary since Market Cap and Total Equity just reflect the equity interests of a firm.  I'm not positive though...

 

In IAS total equity does include the minority interest so it needs to be backed out. US GAAP you need to check - but while it is an option for firms to include it in equity, mostly they include it in liabilities - so there is no adjustment required.

[cobafdek]

Total Equity typically does not include the Minority Interest book carrying value already.

 

I guess it depends on what you mean by Total Equity.  I don't know if there is an official standard terminology, but my understanding is Total Shareholder Equity = Preferred Equity + Minority Interest + Common Equity.  So to get BV in the P/BV calculation, you back out preferred and the non-controlling interest.

 

Or do you make the adjustment on the Market Cap side of the P/B calculation?

 

I don't see why this wouldn't be correct theoretically.  You could adjust Market Cap by MI times an appropriate P/BV for the industry, like you did in the first post of this thread.  Then you would use BV as MI + Common Equity.  It could be an interesting exercise, and I wonder which would be more accurate.

 

Regarding EV/EBITDA,  I read somewhere that if MI is mostly publicly traded, you might have enough info to figure out EBITDA attributable to MI, so that you could adjust the denominator instead of the numerator, and that this may actually be a more accurate estimate of value.  Then again, the effort might not be worth it.

 

But I could be wrong . . .