So welcome everybody.

My name is Alistair Matchett. Um, I am an ex-banker.

I worked at JP Morgan covering oil and gas and financial institutions.

I then worked in private equity for a fund called three I in London for going to the education business.

So we've got, and now together where we're gonna cover the valuation impact of non-controlling interests and equity method investments.

And what we'll do, we'll do a little bit of accounting upfront just to understand the mechanics of them because particularly with non-con controlling interests, if you don't understand that, you won't understand why we're doing the valuation adjustment.

And then we'll make the valuation adjustment and go through the different options you have for dealing with non-con controlling interests and equity method investments and then particularly when we come to equity method investments because you really need to understand what you're doing when you make that adjustment.

So what I'm going to do first before I even go to my slides is I'm gonna go and just explain what we are talking about first.

So I'm gonna share my screen now and you should be able to see my Excel screen.

So if I, lemme just pull in, there we go.

Um, and what I'm going to do first is I'm gonna draw a little diagram.

So imagine we have a holding company.

This is a holding company here and the holding company is issued shares into the general stock market.

And these are what we will call the common shares.

And that's when we're thinking about market cap capitalization.

Those are the shares we're talking about.

Now this holding company actually has two companies within the group and one of them company A here we are gonna assume that they don't own a hundred percent of that company.

They own 80%.

So this means there's a 20% shareholding directly inside that subsidiary. So it's not 20% of the holding company, but it's 20% of the actual company a subsidiary.

And then we've got company B and company B's case.

What we have is we have a 30% shareholding by the holding company, which means there's somebody else who owns 70%.

Now under the consolidation rules, the accountants are really, really clear.

They see control as a overriding important element.

Um, and so therefore when they do the consolidation, of course they will include all the holding company, but they'll also include all company A, even though you only own 80%.

And then they'll do what we call one line consolidation for that 30%.

So this here is what we call a non controlling interest and that is where somebody else owns part of the group.

And then we also have this which is an associate investment and this is also known as an equity method investment.

Okay? So that's how the consolidation works.

So that's what we're talking about is that 20% non-controlling interest and the 30% equity method investment.

This on the left, if I just use a slightly different color here, this on the left, this is an asset and this sits on the liability and equity side of the con consolidated balance sheet.

And it's worth understanding that because in our bridge we need to really understand which side of the bridge you are looking at.

When I say bridge, I mean the enterprise value to equity value bridge.

Okay? That's high level what we mean by non-con controlling interests and equity method investments.

So let me hop over to my slides now and it's worth actually just reiterating how we calculate enterprise value.

And I'm taking this from the perspective of calculating enterprise value for a trading comps multiple.

So we start with the diluted mark market capitalization and that represents the holding company equities.

This is the holding co equity.

However, that's not all the equity in the group.

So by adding the NCI, what we are doing effectively by combining those two is a hundred percent of the equity financing of the group by taking the market capitalization of the holding company and the non-controlling interest too.

Then we add the preference shares, the debt equivalence and the debt and all these numbers will be consolidated a hundred percent even if you don't own a hundred percent of the subsidiary, subtract cash at a hundred percent short term investments associates and we'll subtract associates will come onto why we do that.

And non-core assets which will give us 100% of the enterprise value.

So the preference shares will be a hundred percent debt equivalence will be a hundred percent, debt will be a hundred percent, cash will be a hundred percent short term investments, a hundred percent the associates owned by the group a hundred percent non-core assets a hundred percent.

And we'll compare all this to our EBITDA And our EBITDA is consolidated on a hundred percent basis basis. So the reason we have to add the NCI to the market capitalization of the holding company is that if we don't do that, we have an inconsistent number between the equity versus all the other assets in our EBITDA and we want to make sure that we are consistent.

So that is why we add the NCI.

'cause what it does, it kind of grosses up your equity to a hundred percent.

I think at this point it's probably quite good to go and do a little exercise.

And if you have any questions as we go, if you type a question in the question and answer the q and a button down below you, you can click on the q and a button and you can ask questions there.

So if you go to Felix, which is where you use what you use to log into the system and you go onto the topics, you'll notice that we have a Felix live topics and this gives us all the recordings of all the webinars that we've done.

And if I come down here on the right, you'll see that we've got a section called non-con controlling Interest and Equity Investments and Valuation.

And if I open this then you can see that this has the downloads here.

Now we're not going to go through all these files, but you can always play around and take a look at them.

But what I'm going to do next is I'm going to go through the file called associates and NCI workout Empty. So I'd like you to download that file if you haven't downloaded it already.

Okay, assuming you've got that file downloaded, I'm gonna open it on my screen here and we're going to just go through one exercise first and I'm going to do it do our calculation here.

So we're buying an 80% stake and the price of the 80% stake is 500 million.

And so we are going to compare that to the she the target shells equity.

Actually, technically I'm gonna change it. This really should be the net assets because if the target has any pre-existing non-controlling interest that would just carry forward to the new group.

So the targets net assets, I'm gonna come down to the beta PLC and I'm gonna take the common stock and the retained earnings of the target company there.

Okay? So that's the net assets that we are acquiring.

So the goodwill calculation, we're going to compare the price of 500 million to the shareholders' equity.

Now the a hundred percent of the kind of the net assets targets, net assets, I'm gonna rename that.

So that's based on 100%, okay? But the problem is we don't actually own all that or because we're only buying 80%, okay? So what we need to do is we need to three 50 by one minus the 80% to reflect the piece that we don't actually own.

So this is the element we are not buying here, okay? So the deal goodwill is going to be the acquisition price minus the targets, net assets, but subtracting the piece that we're not buying that 70 million which is the non-controlling interest.

And so we get goodwill of 220.

So the accounting here, we're going to add the new goodwill of two 20 and we're going to reduce cash by the financing because we use cash in the deal, it was a cash deal.

Now this point, it's actually worth us thinking about doing a pro forma balance sheet and I'm not going to add in the common stock and retained earnings of the target company 'cause that gets deleted.

But what I'm going to do first is I'm gonna do something that is a bit naughty and that is doing the consolidation on a pro-rata basis.

And what that means is that we are going to take the acquirer but only 80% of the target and then the adjustments.

So if I take the acquirer's cash balance plus the targets cash balance times 80% and in the cash line I also need to reduce cash by 500 'cause that was used in the deal.

And let me just narrow column BA little bit so we can see a bit more clearly.

And then I'll just show my formula there.

And then for the other asset line, line items, I'm the acquirer plus the target times 80%.

And this is not correct, right? This is not what the accounting does, but I want to prove something to you first.

And then for the goodwill I'll ignore the target's goodwill, but I'll add the new goodwill that we created and then I'll get the total assets number of 8, 6, 9 0.

Now let's go ahead and do the same thing on the other side of the balance sheet.

I'll take the acquirer plus the target times 80% and then I'll do the same for the rest of the liabilities and then sum up the liabilities.

And then what I'm going to do, lastly I'm just going to pull in the acquirers common stock and retained earnings.

And then I'm going to sum across the non-controlling interests here if there's any pre-existing non-controlling interest and then sum up the equity value and then add the liabilities plus equity.

Now you see at this point it does balance.

So if you did a pro rata consolidation, in other words you only consolidated 80% of the target company, the balance sheet balances.

So this gives you a good understanding of why we need a non-controlling interest because the accounting does not allow us to do this.

What the accounting forces us to do because it has an issue about control, is it forces us to consolidate 100% of the target company.

So it this is not allowed, okay? What you are required to do is you're required to take the cash of the acquirer plus the cash of the target plus any deal adjustment, okay? And then for the rest of the assets we can just some across the and target and we can do that all the way down.

Apart from where when we get to goodwill and we take the acQuire's goodwill plus the target's goodwill, we don't include the target's existing goodwill 'cause that we revalued and that gives us 9 0 7 0.

Then I'm gonna do the same thing with the liabilities add across a hundred percent sum up the liabilities.

But when we come to down to equity, this is an exception, we'll just take the acquirers equity and then the non-controlling interests there were any of the two businesses.

And then I'll sum up the equity and then I'll sum up the liabilities and equity.

Now when I do this you'll see that the balance sheet does not balance.

And the reason it doesn't balance is that we have consolidated a hundred percent of the assets and liabilities, but we've actually only consolidated our share of the equity.

And the way the accounting makes this balance is because we've done not done pro rata consolidation is by adding the piece of the shareholder's equity you did not buy and recording it as a non-controlling interest.

And by doing that what you end up with is you end up with the non, the balance sheet being consolidated on a hundred percent basis.

And it balancing that is why we need a non-controlling interest because the accounting forces you to consolidate 100% of the assets, liabilities, revenues and expenses even though you don't own a hundred percent of the target company.

So that's our starting point.

That's why we need a non-contract interest. It grows up the equity to a hundred percent.

How do we do this from a valuation perspective? Well, let's go and I'm gonna open a new tab here and I'm gonna do a valuation, um, of at and t.

Let's do um, no, just Coca-Cola. Sorry Coca-Cola.

Uh no let's do, sorry, sorry, I'm just thinking PPG. Let's do PPG. Apologies. Okay, let's do PPG.

So PPG, what we're going to do is we're gonna go back to Felix and I'm gonna go and search for the information on PPG and I'm gonna see if they have a non-controlling interest unless they do.

So what I'm going to do here is I'm actually gonna copy this bridge 'cause it just gives us some base numbers to work with.

So I'm gonna copy this bridge here and I'm gonna paste this into Excel.

Okay? I'm gonna paste it into Excel.

And then what I'm going to do once I've pasted it in, I'm just going to show you the calculation quickly.

So we've got some assumptions here.

We've got the share price, the basic shares, we've got the dilution dilution adjustment.

I'm not gonna break that out, but that'll be options and RSUs.

Then the fully diluted shares outstanding, which it's just gonna be the basic shares plus the dilution adjustment.

And then for the fully diluted market capitalization, I'll take the fully diluted shares times the share price.

Now that gives us not a hundred percent of the equity in order to get a hundred percent we have to add in the NCI.

Now most people when they approach this from a valuation perspective, they will take the NCI on the balance sheet of the company.

So this at the moment is the balance sheet number, but we're gonna review that and then we'll also add on debt equivalences, unfunded pensions and then we will shift over from the capital side to the asset side, we'll subtract investments and cash.

And that means our enterprise value is the sum of the capital value minus the sum of the two financial assets.

So that gives me my enterprise value, which then I can compare to EBITDA.

So I've got my EBITDA here and let's get a CY one EBITDA for PPG. Let me get 'em down here and we'll do CY one.

Just copy that into there.

Okay, let me paste that in. There we go.

And so this is EV over CY one EBITDA and we can divide through.

Now just to reiterate here, this is just the holding company's equity, okay? All the way down here, this is a hundred percent of the group, that's a hundred percent of the group, that's a hundred percent of the group, that's a hundred percent of the group and that's a hundred percent of the group.

And by adding in the NCI, what we do here is we ensure that this in its entirety, so the NCI plus the holding company gives you a hundred percent of the equity and that's why we are adding in the NCI Now once now we've understood what the NCI is.

Let's just think about that number. The 1 7 8.

Well there are two pieces of information that we can get from the accounts about non-con controlling interest.

We can get the NCI on the consolidated balance sheet.

Okay? So I'm gonna again get the NCI and the consolidated balance sheet and we'll do it from PPG.

I'm actually going to use it from the 10 K because it uses full year numbers, it just makes the explanation a little bit easier.

So I'm going to the 10 K of PPG and I'm gonna go to the consolidated balance sheet.

And on the consolidate consolidated balance sheet, I'm gonna take the non-con controlling interest.

Now this is slightly different from the NCI here because this is using the 10 Q 'cause it's more recent.

But because I just want to keep things simple, I've taken the numbers from the 10 K here.

And then what I'm going to do is I'm gonna put the NCI on the on the consolidated or just the consolidated on the consolidated income statement.

And if I go to back to the financials and I go to the statement of income and then I'll get the NCI here, which is the n net income attributed to PPG.

And then the NCI share of income here, it's that 28. So I'm just gonna copy that and paste it in control, just copy the link.

There we go. And control V to paste it in.

Now what this means we can do is we can calculate an implied PE multiple because what this represents here is that that represents the share of equity that the third party ownership has in the target.

And this represents their share of net income.

So it's an implied PE multiple.

So in this case the implied PE multiple of the balance sheet number is 4.2 times it's low single digits.

Now if I could buy stock at low single digits of 4.2 times, I would be a billion A by now.

So this is really unrealistic valuation and actually what we probably should do is we should use a more reasonable PE multiple.

Now this presupposes that the subsidiary that the non-controlling interest has an ownership of is in the same business line as PPG.

Now generally speaking, if you control the subsidiary, that would be a fairly reasonable approach.

So what I'm gonna do is I'm gonna take PPGs share price here and the PPGs share price if I just go to the tear sheet quickly is 137.25.

So I'm gonna paste that, in fact I should just paste it in as text. There we go. So that's the share price.

And then what I'm going to do is I'm going take the historical EPS because it's, that's going to be, it's a historical number that we've got through the NCI share of earnings. So I need to be consistent.

So what I'm going to do is press release.

Now hopefully they'll give us the non-GAAP EPS.

So you can see here the, they've got that for the, for the quarter and then hopefully they'll give us the year number. Here we go. Adjusted EPS for the year is $6 and 5 cents in 2022.

So I'll paste that in. And then what I'm going to do is I'll do a historical PE ratio.

So I'll take the share price of PPG and I'll divide it by the historical EPS and I get 22 times.

So you can see that's a vast difference between the 4.2 times that we are implying if we use the balance sheet number.

So a more appropriate way of valuing the NCI would be to take the NCI i's share of profits, which is 28 in the 10 K and uh, multiply it by the N, the price earnings multiple of PPG.

So this means now we are valuing the NCI, not the balance sheet number, but a considerably higher number to reflect market values.

'cause we need to actually reflect the market value of our enterprise value to get a accurate read of the EBITDA number.

So this means now our EVCY one EBITDA is about 13.6.

So what does this mean for valuation? Well the non-con controlling interest on the balance sheet represents the original price paid plus any reinvested earnings.

So on the balance sheet that equals the price original um, or original value rather than price paid plus any reinvested earnings.

So this means you start with the beginning balance and you add the third party's shareholder, their share of net income of the subsidiary and then you subtract dividends that you pay to them because that reduces their equity value and that will give us the ending balance.

So when we think about the bridge from equity value to enterprise value, most people will use the balance sheet number.

The problem with using the balance sheet number is it's usually undervalues the NCI.

Because actually what we should do is that the first thing we should ask ourself is the NCI quoted.

Now the NCI can be quoted because of quite a common structure for initial public offering where you want to IPO one of your subsidiaries is not to IPO the whole thing because you get huge discounts when you issue shares.

And secondly you've got the big underwriting fees.

So normally what a company will do will do an IPO of 30% of these subsidiaries value, which means that you'll create a non-controlling interest when you do that IPO.

So in some cases the NCA may, the NCI may be quoted.

And of course if it's quoted fantastic, just use the share of the market value.

Okay? Easy. Sometimes if you look in the footnotes, they may give you a fair value of the NCI.

If they do obviously use that if in the notes they don't give you a fair value and it's not a listed ownership stake, which frankly in most cases is probably the case that you'll deal with, what you can then do is look at the income statement to see if the n the NCI share of net income is positive.

And then if you understand what type of business it is, and usually if you have a controlling stake, it will be in the same business line as the main company, then you can use the sector PE multiple to give you a market value.

If you can't do any of that or the share of earnings is a show of loss, then we can just use book values.

So those are the options for the non-controlling interest.

Most people for most companies will probably be okay using book values because in many cases the NCR isn't that big, but you will come across CR cases where if you do that you will dramatically understate the enterprise value and that means your multiple will be relatively low because you've got a hundred percent consolidation of ebitda, a hundred percent consolidation of cash debt and um, not equity.

Okay? So that's the NCI share of things.

And this is, remember in our bridge, if we go back, what we've been focusing on is this number here.

So it's on the capital side and it represents capital that is provided by a third party shareholder who has a direct investment in the subsidiary, not in the holding company.

So for example, if A CEO has a big stake in the holding company, they are not a non-controlling interest, they're just a regular shareholder. They're a minority but they're a regular shareholder.

And NCI is where somebody owns directly into the subsidiary, not the holding company.

Now let's hop over and look at the equity method investments.

Now, equity method investments have a number of different names.

So equity method investments can be called associates or sometimes affiliates or joint ventures as well.

Joint venture. So what is this? This is where the main company has made an investment in another company.

So this is an asset to them and it's where they have significant influence and it's an ownership of between 20 and 50% of the other company.

Now what we do here is we have one line consolidation, okay? So we have one line on the income statement, one line on the balance sheet and one line on the cash flow statement.

So it's probably worth if we take an example and the example I'm gonna use is gonna be Coca-Cola, okay? And you'll see why. So if I just zoom in a little bit so we can see more clearly.

So the first thing we're going to do is the equity method investments.

So we have one line consolidation and the first is the income statement, the income state.

We have one line equity income.

And what this is, this is a you the company's share of income of the other business.

And when I say income, it's actually a share of net income, not ebitda, not operating profit, but profit after tax net income, okay? On the balance sheet what we have is equity method investments.

And this is on the asset side of the balance sheet.

Okay? So this is an asset and this represents the original purchase price plus any reinvested earnings.

Okay? So that's sacred method investments on the balance sheet and then on the cash flow statement, because the equity income is a share of net income, this is not necessarily paid out to to the company.

In other words, it's not necessarily cash.

So what the cash flow statement does is it subtracts, so less equity income.

So it removes the equity income but then it replaces it with plus dividends received.

Okay? So on the cash flow statement you'll subtract equity income, but then you replace it with the dividends received.

So let's actually look at Coca-Cola's consolidation here and we'll do the income statement first.

So I'm gonna go to the filings, let me go back to the front page of Felix and I'll just search for Coca-Cola.

And what I'm going to do here is I'll go to the 10 k, just makes it easier using the 10 K 'cause it's full in numbers and in in the time we've got, that's kind of all we've got chance to do.

So I'm gonna go to the Coca-Cola 10 K and I'm gonna go to the income statement.

And on the income statement you can see here if I zoom in a little bit, you can see the equity income.

Now notice the equity income is below the operating profit line.

So what that represents is it's not in operating profit, which means it's probably not captured by your EBIT calculations.

And if it's not cap captured by your EBIT calculations, it's not gonna be captured by your EBITDA calculations.

So this number here, that 1 1 4 7 2 that is representing Coca-Cola's share of the net income in the other companies, okay? That's a share of net income.

Now it's confusing 'cause it's actually above the tax line and in US GAAP it usually is above the tax line but below operating profit.

However, for a lot of UK companies which are under IRS, if I just open um, another tab and we look at let's say um, bp, um, I'm pretty sure that they have, if I go to the annual report, I am pretty sure that they have um, an equity method investment oil companies usually do.

What we're gonna do is take a look at their income statement and under IFRS accounting, what you will normally see is that the equity income is shown right at the very, very bottom of the income statement.

So I'm just gonna wait until that loads, I'm gonna go back and just finish this for Coca-Cola.

So the equity method investments on Coca-Cola's balance sheet here.

If I go down a bit and I go to the balance sheet, Coca-Cola's ETH investment is at 18 billion.

Okay? So I'm gonna put that into my little grid here so that that is the original purchase price plus any reinvested earnings.

But in Coca-Cola's case, a lot of that are bottling companies and they have owned those for decades.

So actually the purchase price is really quite old.

So it's kind of like a really old purchase price plus some reinvested earnings.

And then on the cash flow statement, while we're here, if I go to the segment of cash flows, um, you can see that we've got equity income.

So equity income and parentheses subtracting it, net of dividends.

So, and that's negative 8 3 8.

So if I put that down, I'm just gonna make it negative.

So what we can then do that represents of that 14 72, 838 was non-cash.

So the dividends received here is actually calculated by taking the equity income minus or actually 'cause it's negative already plus that.

So the dividends received was 634 million and the element of the equity income that was non-cash is the 838 and that's what we're subtracting from net income to get cash income.

Now let's go to BP 'cause I want to show you the other type of disclosure that you will see.

Okay, so if we've got a table of contents, let's see if we can, oh we can't link to them but let's just see whether we get the financial stems. Yeah, that's page 151.

So we go all the way down to 151, got a little bit far, this is the cashflow statement group income statement.

So let's take a look here um, and see if they have any equity.

Oh so this is, this is classic IFS.

They've actually put it right up the top here.

Earnings from joint ventures and associates after interest and after tax, really what that means is the share of net income and they put it right at the top usually under our FS. It's right down at the bottom here.

I dunno if we have um, Saint Gaman. Let me just see if I can because I really love to show you Saint.

Um, there we goman.

Um, and I'll just see if I can pull the annual report, annual financial statements. Let's see if that comes up quickly because I, this is quite useful 'cause under IFS you've got a lot of flexibility about how you lay the income statement out.

Just while we're waiting for that to load, what I'm going to do now is I'm going to show an example of how this impacts our valuation.

So I'm gonna go to the tear sheet for Coca-Cola. In fact, just before I do that, let me show you hopefully sinker bands income stent will be a good example of this.

You never know. So I'm gonna go down to the income statement. That's a balance sheet. And if we have here, oh they do have actually above operating profit there, can you see that's above operating profit.

It's a classic I for it's all over the place in this case the equity income, um, is above here.

And then the share of net income, they've also got some down at the bottom here.

That's kind of crazy how they split those out.

I dunno why and I'm not gonna look but that's just an example of how messy it gets.

So let's now apply this to the valuation of Coca-Cola.

So I'm gonna go to the Coca-Cola's tear sheet and I'm going to pull in the equity to enterprise value bridge for Coca-Cola.

Let me just paste that in.

And just as before we have our little little bridge calculation here.

So we've got our calculation of the diluted shares outstanding, which is the basic shares plus the dilution calculation.

And then we've got the fully diluted market cap, which is that times the share price and I'm just going to leave NCI as it is.

We could always check it but I'm just gonna leave it as it is for now because we just don't really have enough time for that.

And then we're going to take the um, debt and pension liability and in this case we have got some investments and we've got some cash and then we will just do the enterprise value.

And the enterprise value is the value of the capital, okay? Minus the financial assets.

Now if I'm gonna do a little check to see what's in that investment line item there.

So I'm gonna go back to Felix and let's just click on the investments here.

And you can see it says equity method investments.

So I'm gonna find out where that number is coming from in the financial statements and you can see it is in equity method investments.

Can you see that? So that's in equity method investments there.

So that does represent the equity method investments, but this is the book value of the equity method investments.

Now that represents the original purchase price, which is quite old plus any reinvested earnings.

So what I'm going to do is I'm gonna be a mi bit more granular about this and I'm going to go to the notes to the accounts for equity method investments.

So I'm gonna go back to the filing and I'm gonna go to the sections and in the um, notes to the accounts for equity method investments, which this is, oh this is the 10 Q, I'm just gonna come out of that 'cause Felix takes the Q.

So let me just go to the 10 K and you can see the 10 Q doesn't have the information. So you usually have to go to the K.

So I'm going to the equity method investments and they've given us some quite detailed information here.

This is unusual. They've given us actually the full income statement for the equity investments in aggregate.

And then they've given us the full balance sheet and what is on the balance sheet of the full balance sheet of the equity meth investments in aggregate and then what's in the balance sheet of Coca-Cola, which is that 18 number in the 10 k.

Now also really nicely they give us some fair value information.

So they're telling us that the equity method investments, some of them but not all include an investment in monster that's quoted and then a series of bottling operations which are also quoted.

So the fair value column actually is a market value of all those investments.

So what I'm gonna do, we have in the get balance sheet value, and I know this is slightly different from this number here, is that the bridge is using the 10 Q balance sheet and I'm going to use the 10 K balance sheet and I'm doing that frankly for expediency because I just don't have enough time in this hour.

But if I take the balance sheet number from the 10 K, which is the 18 2 6 4 of that balance sheet, the quoted balance sheet investments, we can see they're carrying values that 12 billion.

So of that 18 billion, 12 billion are quoted investments and the qued investments here is the difference between the 18 and the 12.

So there's about 6.2 billion of qued investments.

So then what I'm going to do is I'm going to use the market value of quoted investments and I should abbreviate that.

So the market value they tell us is about 23 billion.

So they're on the balance sheet at 12, but actually the market values them is 23 billion.

So that's pretty significant.

What we then can do is we can add on the book value of qued investments because we don't really have a way of valuing them and that's at 6 billion.

So our total estimated value is the sum of those two.

So what that does, it gets us much closer to the market value because we're for about two thirds of the investments we're using market values.

Now it doesn't really get us all the way there but it gets us pretty close, right? And compare that to what is on the balance sheet.

It's 19 billion.

So this is a $10 billion difference between these two values.

So that's method one.

Another method that we could use, okay is method two is what we can do is we can start taking some more information from the financial statements.

So I'm gonna take the equity income from the 10 K filing.

So I'm just gonna take it from the 10 K filing.

So let me zoom out a bit.

I'm gonna go to the income statement and I'm gonna take the equity income from the 10 K filing.

I'm not doing it for the QI know there's a bit of inconsistency but I'm just doing this.

Otherwise we'd have to do LTM and it'll take a lot more time and we don't have enough time left.

So that's the equity income in the 10 K.

And then um, what I'm going to do is I'm gonna calculate what PE multiple Coca-Cola trades app, assuming making this assumption that actually the equity meth investments are in the similar business line as Coca-Cola and it's bottling operations and monsters. So it is kind of similar.

They may not trade at exactly the same PE multiples and that's one of the assessments you need to think carefully about.

So what I'm gonna do is I'm gonna take the equity income and then apply Coca-Cola's price earnings ratio. We've gotta use a price earnings ratio 'cause that 1482 is a share of net income.

So I'll take Coca-Cola's Share price and Coca-Cola's share price is given to us up here is that $60.

And and then what I'm also going to do is I'm gonna take Coca-Cola's um, EPS from the historical year, which is 2022.

Okay? And I know this is a bit inconsistent, we could use LTM but I just don't have time to do that.

So let me go back to Felix and I'm gonna go to the Coca-Cola tear sheet again and I'm gonna go to the press release for the 10 K and I'm looking for the non gap earnings here.

So I'm gonna go all the way to the end of the press release with these tables are, and if I come all the way down, got the three months and that's year ended, that's just by geographical breakdown three months.

And then here we've got the year.

So what I'm looking for is the EPS on a recurring basis and you can see here that the diluted net income per share, and this is for the full year, okay, the year ended December 31st, 2022 and the number is the 2.48.

So I'm gonna take the 2.48 and then we can calculate an implied PE multiple.

So a historic, it's not implied actually it's just a historic PE multiple that Coca-Cola is currently trading on.

So I'll take the 60 divided by the 2 4 8.

So it's 24 times now.

So the estimated value of the equity method investments, and I'll just put equity method investments, is the share of net income times a reasonable PE ratio.

And I'm assuming it's the same PE ratio as Coca-Cola.

So we get 35 billion.

So the carrying value here is about 19 billion, but actually we could use a value of 35 billion.

So if I just do the CY one EBITDA currently for Coca-Cola and be going get it from the um, Cisco code, yeah I'll get the CY one EBITDA, copy that and I'll paste that in.

Okay? And then we get EV over CY one ebitda.

So in this case, if I take the enterprise value divided by that, I get 18.2 times as my multiple.

Whereas if I use the market value of NCI, which I think we got up, did we do? Oh no we didn't do the market value of NCI but we could actually do the same multiple valuation of the NCI as well.

So let's assume it's in the same business line. So I'll do the NCI um, share of income.

So the NCI share of income, I'll go back to my filing and I need a 10 K filing and I'll go to the income statement for the year end and get the share of income related to the NCI. So I'll do everything on a um, market value basis and the NCI actually is just 29 so it's pretty tiny, it's not gonna make a big difference big differe and it may actually come up with less than that. Yeah, it's actually gonna come up with less. Lemme just check that.

So that share of net income 29 times the PE multiple, it's actually gonna come up with less. So I'm actually gonna leave that as it is.

But for the investments I'm not gonna use that.

I'm gonna use that 35 number and look what happens to the multiple. It goes from 18 time, 18.2 times to 17.1 times.

So that's nearly a full turn of ebitda which can make a big difference in a negotiation.

So In This case we have calculated the EBITDA and what this enterprise value is, it's a controlled enterprise value.

So EV excluding the associate investment is equal to a controlled EBITDA or controlled enterprise value.

And you that would need to be consistently applied to an EBITDA excluding equity income which equals a controlled EBITDA number.

Now let me give you an example of a deal where this is very sensitive.

When Vodafone acquired madman, which is a German telco company, it was just around the time of the 3G um, technology being developed and a lot of the telcos in Europe had bought licensed spectrum in auctions from European governments and they'd spent billions and billions and billions of dollars on this license spectrum and they were building kind of pan-European networks.

So there were a lot of associate investments in companies like Vodafone and Mann and lots of the other telcos.

But what the market was looking at when they were looking at these businesses, they were saying look, you need to get cash from your subsidiaries to service this debt that you've taken out to buy the license spectrum number one.

And number two, you need to roll out the technology for the 3G license spectrum at the same time to get economies of scale from your CapEx plans.

As a consequence, the market was putting a much higher multiple and controlled EBITDA than it was uncontrolled earnings like equity income.

And in that deal they actually negotiated on a controlled EBITDA multiple rather than a consolidated including equity income.

And remember, equity income is not EBITDA equity income is a share of net income, not ebitda.

So actually by including equity income in your EBITDA and leaving equity investments in your enterprise value, you are actually giving a a kind of blend of enterprise value and equity values and EBITDA and net income.

So I would advise always to exclude your equity method investments from your enterprise value and exclude equity income from your EBITDA.

And the reason for that, it's gonna give you a much cleaner valuation multiple and you can estimate the market value by using multiples.

So just in summary, if the equity affiliate is listed, obviously use the market value for it, it may have a fair value in the footnotes in that case, use that fair value.

If there's none of that information and it has a positive share of income, then if you know what sector the equity method investment's in, then you can use a price earnings multiple.

You could use price to book value multiple.

And if none of that's true, then you can use the book value multiple for your trading comps valuation.

Okay, we are pretty much done.

I dunno if anyone has any questions, um, we will be recording this and we will be uploading the recording to the classroom and my notes from the session as well.

But I hope you had a, um, uh, it was useful.

Remember we are doing these sessions every week and if I just show you what we've got next week and it's three times a day next week, we've got scenarios in models, building scenarios using different functions.

The week after that we have got LBO analysis as well.

Okay, thank you very much.

I hope you all have a really great weekend.