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Stub valuation with JVs / associates

san-br's picture


Feb 24th, 2019 6:27am

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am looking at an example where a company has a number of JVs and associates and the task is to calculate the value of the so called stub.

A company owns 80% of JVs worth 100m due to a recent deal with an investor, has 10m in net cash, the JVs are valued at 5m on the balance sheet, the current market cap is 150m, total EBIT is 5m and the pre-tax income from JVs is 1m. There is also PP&E worth 10m.

So I calculated the following:

-> Equity value = 0.8*100 for JVs + net cash 10m + 0 for JVs on balance sheet as recently valued in a transaction = 90m

-> Stub value = market cap 150m - equity value 90m = 60m

-> Implied EV/EBIT = (stub 60m - net cash 10m) / (EBIT 5m - profit from JVs 1m) = 12.5x

Is that the right way to look at it?

If at all, how should the net PP&E be accounted for? 

Thank you

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Does anyone have a view on this?



I think you calculated the stub using the correct method - is the net cash from the parent or the JV? Also is the PPE parent or JV?

You would need to account for the PPE as these would be seen as core “operating” assets to the business. Also, using EBIT and not EBITDA?  You mention the JVs are valued at 5m on the balance sheet but value it a zero when adding it back?

I am not convinced you are using the net cash correctly if this is the cash of the parent.

Net cash is from the parent, same for PP&E. Would argue PP&E used for operating the business (not liquidating it). I personally have not seen PP&E being used in a valuation other than net tangible asset or liquidation value.

As said, there was a recent deal with an investor. Hence, one of the JVs was valued higher than it is reported.

Any other views about the method as such?

Does anyone have a view on the PP&E? 

Basically you want to adjust the multiples and EV for the value of the JV and then recalculate your multiples. 

For EV you’d take company Market Cap + Net Debt - Value of JV (or Unadjusted EV - Value JV)

I believe your EV/EBIT multiple is incorrect. If it is equity method, the income from the JV should flow in below the EBIT line, correct? That flows in after EBIT but Pre-Tax, so you shouldn’t need to adjust that EBIT. Then you’d want to calculate your adjusted EV/EBIT multiple, because it will be different than the historical EV/EBIT (as you did, but instead Adjusted EV/unadjusted EBIT). You can then apply that multiple to a projection and get a value for the stub company. 

Only reason you’d adjust the income statement side of the multiple is if you use a P/E multiple, in which case you’d back out the JV share of income from the net income line, adjust the market cap (unadjusted market cap - value of JV) and recalculate your adjusted P/E multiple, which you can then use to value the company based on a projection of future core (stub) net income. 

I’m not really sure why you’d use the PP&E unless you were calculating the value of the business based on assets which seems like 1. you don’t have enough information, and 2. it’s rare to do that outside of breaking a company up in a BK proceeding or something. 

You can PM me if you need more help with it. 

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