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Pensions

When calculating Enterprise Value for valuation - do you include Net Pension Obligation as part of EV?  I have seen analysts include, not include and was curious what folks do here. 

Thanks,
DallasCFA

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I include it and I don’t see any reason not to include it because those expenses go with the corporate entity in the event of a buy out. They are not “optional” expenses either, and if you look at enough companies with pension liabilities on the books over a long enough time period, you will have to conclude that the pension can be a material value driver / destroyer of enterprise value. Many companies post-Lehman got whacked pretty hard, and since pensions are real cash expenses for a business, they should therefore be added to EV as debt would be.

I constantly adjust EV for expected / possible transactions as well, i.e., projected EV, which most analysts on the Street don’t do. It makes sense to execute a possible range of value based on predictable, but unknowable, possible future transactions. For example, if a company has a history of buying stock and paying down debt (or I have reason to believe they will do that in the future), both of those could be material value drivers for someone long the stock, but for some reason most of the Street would only attempt to model share buybacks, when in fact both stock and debt buybacks are essentially the same thing if you are deriving total enterprise value, backing out an implied equity value, and then dividing by the number of shares out. I guess some people only look at market cap, but that makes no sense to me for lots of reasons. The equity value should only be considered as a function of total enterprise value IMO.

I consider Pensions a form of debt. But in FCFE you add back interest (1-t), however with pensions, I don’t add back the interest cost because that goes to different set of stakeholders.