Here's an outline of what we'll cover in this free Minority Stake Acquisition tutorial: Why Does This Matter?
By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers"
The way you reflect minority stake purchases on the financial statements differs from what you do for acquisitions of entire companies, and from greater than 50% ownership acquisitions.
We create an item called "Equity Investments" AKA "Investments in Equity Interests" AKA "Associate Companies" on the Balance Sheet to reflect cases where we own less than 50% of other companies.
It's also very, very common to see these deals in the news... we're looking at a ~$2.6 billion deal here between Liberty Media and Charter Communications
Liberty Media is a large holding company and media conglomerate that buys stakes in lots of media companies... such as Sirius XM Radio, Time Warner, Viacom, Live Nation, Crown Media, and Barnes & Noble.
Charter Communications is the 4th largest cable operator in the US, as of the time of this deal.
Liberty purchased a 27% stake in Charter, worth $2.6 billion, which was announced in Q1 2013 and closed in Q2 2013.
We're going to look at this acquisition via a 4-step process in this set of tutorial videos:
1. What happens on the financial statements when you purchase that initial minority stake in a company? We'll cover this first step in this tutorial.
2. What happens on the statements after running the business for several years, with that minority stake included?
3. What happens when you increase your ownership in that company?
4. How do you reflect a sale of a minority stake on the financial statements?
What Do You Do to Reflect This?
It's DIFFERENT from greater than 50% ownership acquisition because you do NOT go through the purchase price allocation process at all - no Goodwill, no write-ups, no consolidation of the financial statements, etc.
Instead, you simply reflect the cash/debt/stock used to fund the deal on the Balance Sheet, create the new line item for your ownership in the other company, and also reflect any transaction fees paid for this minority stake.
So this initial step is pretty simple - but it gets more complicated when you have to reflect earnings and dividends from the Equity Investments *after* the transaction closes.
How Do You Reflect This Type of Acquisition on the Statements?
1. First, you need 3-statement projections for the Parent Company and target company.
We've already filled these in here, based on equity research and our own estimates - this is NOT the focus of this lesson, so we're not going over how to create these projections.
If the deal closes in the middle of the year, quarterly projections are best so you can be more precise - here, we're dividing 2013 into quarters but leaving the other years in annual figures.
2. Then, you need to look up information on the deal - the close date, purchase price, % cash/debt/stock used, and anything else relevant such as the maximum ownership percentage.
3. Then, go to Balance Sheet and reflect cash/debt/stock used and creation of new Equity Investments line item.
Careful with debits and credits...
CR Asset = Reduce it, CR Liability = Increase it.
DR Asset = Increase it, DR Liability = Reduce It.
Aside from cash, debt, and the Equity Investments line item, most other line items will not be adjusted at all in this initial transaction.
So the set of steps here is just:
DR Equity Investments
CR Long-Term Debt
And if you've set up the model correctly, the Balance Sheet should remain in balance.
Most other line items will be $0 - we're ignoring transaction and financing fees here.
In parts 2-4, we'll walk through what happens on all 3 statements when a minority stake is purchased, what happens when the parent company increases its ownership, and what happens when it finally sells that minority stake to someone else.
Again, we'll be using this Liberty Media / Charter Communications deal as the example for all the steps here.