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From Equity Value to Enterprise Value: “The Bridge” for Target, Vivendi, and Zendesk (24:00)

You’ll learn how to calculate Current Enterprise Value, starting with Current Equity Value, in this lesson, for three very different companies: Target, Vivendi, and Zendesk. You’ll learn how to treat items like pensions, operating leases, net operating losses, convertible bonds, and more.

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The Equity Value to Enterprise Value “Bridge” for Real Companies

We receive many questions about Enterprise Value vs. Equity Value, but we also get many questions about how to calculate Enterprise Value.

When you’re analyzing public companies, you normally start by calculating the Equity Value for each company and then creating a “bridge” to Enterprise Value.

This process should not be difficult if you follow the standard formula for Enterprise Value:

  • Enterprise Value = Equity Value – Non-Operating Assets + Liability and Equity Items That Represent Other Investor Groups (i.e., ones besides Common Shareholders)

Ideally, you will use the market values of these items, but if they’re not available, the book values fine for everything except Equity Value.

Common examples of items in each category include:

  • Non-Operating Assets: Cash, Financial Investments, Rental Properties (if it’s not a real estate company), Side Businesses, Assets Held for Sale, Discontinued Operations, Equity Investments or Associate Companies, and Net Operating Losses (NOLs) (a component of the Deferred Tax Asset).
  • Liability and Equity Items That Represent Other Investor Groups (i.e., ones beyond common shareholders): Debt, Preferred Stock, Capital Leases, Noncontrolling Interests, Unfunded Pensions, and (potentially) Operating Leases.

If you find something not on this list that you want to add or subtract, you should proceed very carefully because there are not that many “special items.”

The company’s Balance Sheet is your starting point for this exercise, but you’ll need to go beyond it to find items like the Fair Market Value of Debt, details on the Pension Plans, and the Net Operating Losses embedded in the Deferred Tax Asset.

Equity Value to Enterprise Value: Example Calculations

Here are examples for Target, Zendesk, and Vivendi, starting with Target:

Target - Equity Value to Enterprise Value

This Equity Value to Enterprise Value calculation for Target is a fairly standard bridge. A few notes:

  • Debt: The company initially grouped Debt and Capital Leases on its Balance Sheet, so we separated them and found the Fair Market Value of the Debt portion, which is used in this bridge.
  • Pensions: We count only the unfunded or underfunded portion, which equals MAX(0, Pension Liabilities – Pension Assets). We also multiply by (1 – Tax Rate) since contributions into pension plans are tax-deductible in the U.S.
  • Operating Leases: We choose not to count this item as “another investor group” here; it could go either way under U.S. GAAP, as long as you’re consistent in the valuation multiples.

For Zendesk, we use the following Equity Value to Enterprise Value bridge:

Zendesk - Equity Value to Enterprise Value

  • Net Operating Losses: We found these by searching for the Deferred Tax Asset disclosures. They’re considered “non-operating” because they’re not required to run the business and do not flow through the statements automatically, as other components of the DTA do. Technically, we should adjust the NOLs and remove the portion that is unlikely to be utilized, but this is not necessary in a quick analysis (see: more on Net Operating Loss accounting).
  • Total Debt: The company’s Convertible Bonds do not create dilution in this case because the company’s current share price is below the conversion price. Therefore, we count the entire Fair Market Value of the Convertible Bonds as Debt in the Enterprise Value calculation.

Finally, we use this Equity Value to Enterprise Value bridge for Vivendi:

Vivendi - Equity Value to Enterprise Value

  • Equity Investments and Noncontrolling Interests: We took both of these directly from the Balance Sheet because the company did not disclose their Fair Market Values in a straightforward way.
  • Total Debt: We took the Balance Sheet number and replaced portions of it with the Fair Market Value numbers the company disclosed.
  • Unfunded Pensions: Similar to Target, this is MAX(0, Pension Liabilities – Pension Assets). But we do not multiply by (1 – Tax Rate) here, under the assumption that contributions into most European pension plans are not tax-deductible.
  • Operating Leases: Yes, we count them as “another investor group” here. The reason is that under IFRS, companies must split the rental expense into Interest and Depreciation elements on the Income Statement, so Operating Leases must be included in Enterprise Value – or multiples such as TEV / EBITDA will be inconsistent.

We occasionally get questions about other items that might potentially be counted in this Equity Value to Enterprise Value bridge, but there’s rarely a good reason to include other items.

Goodwill & Other Intangibles should never be in here, nor should DTAs (except for the NOLs) or DTLs; Industry-Specific Assets (such as “Content Assets” for media companies like Vivendi and Netflix) are operational , so they should also not be here.

Sometimes people will add items like Legal and Restructuring Liabilities, and you may need to look at an item like “Provisions” in more detail to see what’s in it.

We cover some of these items and more advanced, special cases in the full courses on this site.