Valuation for acquisition of a significant minority interest, eg: 15% - 40%

Need your bright minds / sharp comments on a valuation case for a chain of hospitals. Please shoot! (the more the harder, the better)

Setting: Acquisition of significant minority interest, eg: 15%, but may increase stake to 40%

One proposed method is DCF for the EV

FirmValue0 = FCF1 / (WACC - g)

Then EVo = FirmValue0 + Cash - Debt

Now, the questions are:

  1. What’s the best (or usual) practice to project the growth rate g?

  2. After finding Value0 of the whole hospital chain (100% Working interest), if investor wants to acquire minority stake, eg: 15%, is it just simply a calculation of 15% x EVo? Should there be any minority discount on the value and if yes, what is the best practice to find such minority discount? Or is there better method to calculate minority interest valuation not using DCF method?

  3. Other alternative check is to use multiples valuation, in which using market P/E to derive P of the target. Is this an appropriate way for hospital biz, or is there other better multiples to use? What are the pros and cons of this approach?

1- Country’s projected economy growth or industry growth. 2- Include DLOC (which can range from 5-20%) depends on several factors. 3- Check EV/EBITDA for precedent transactions / comparables in the industry and use several scenarios ie 25th, median, 75 percentile results. Scenario analysis would be beneficial.

Thanks Bilal.

On the (2), the discount for minority interest, what are the possible factors for the DLOC?

On the (3), can you elaborate what you meant for scenario analysis of the 25th, median, 75th here? Is it like, let say you have 10 historical data points of past transactions, meaning you can derive 10 possible prices, ie: you will have a price ranges. So what’s the scenario analysis here?

2, when a company acquires a non-controlling stake = > decision power is not actually there so whenever you want to know the actual value, you do the whole valuation process and apply a certain discount (5-20%) to reflect the no decision making power.

3, it’s really subjective and the reason you do the whole scenario analysis is to see comparison analysis esp if you’re submitting your results to BOD, management, etc…

one step ahead

what are the details on this? if the purchase includes an option to purchase more later at a specified price than you also need to consider the value of that option


I’ll try to answer part of question number 2 on quantifying minority discount.

So in a notional market sense, some of the following factors affect the quantum of discount :

  • size of the shareholding and its relative importance

  • existing shareholders’ agreement

  • articles of incorporation and by-laws

  • shareholder / familial relationships

  • nuisance value

Plz note I’ve just given general points without specifically analyzing your situation (15% - 40% of a hospital chain which seems to be located in Australia). If you want to have a discussion PM me, glad to chat.