What value to put on minority interests?
How should minority interests
be treated in a discounted free cash flow model? Minority interests correspond
to the share of fully consolidated subsidiaries in earnings or shareholders'
Financial projections may be available subsidiary by subsidiary, in which case it is possible to calculate the value of each subsidiary. The value of the group's shares is then equal to the sum of the values of each subsidiary multiplied by the percentage of shares held in each subsidiary.
Financial projections may not be available subsidiary by subsidiary, but only on the group level. The DCF value is then that of the group, if it owns 100% of the subsidiaries. This value is then not only attributable to parent company shareholders but also minority shareholders of the subsidiaries.
A simple multiple-based approach can be used. To simplify to the extreme, the group's implied P/Es can be applied to minorities' share of net profit to get an initial estimate of the value of minority interests. Alternatively, the group's implied PBR1 can be applied to minority interests appearing on the balance sheet. However, we would advise against using the book value for valuing minority interests, as it is just a stopgap method.
(1) i.e. the price-to-book ratio.