Vivendi SA - Why Do You Add or Subtract Items When Calculating Enterprise Value?

( in Millions Except Per Share Data and $ in USD Where Noted)

What Goes Into Enterprise Value?

Key Point of This Lesson: There's A LOT of confusion over how exactly you calculate Enterprise Value
Yes, everyone knows the definition: Take Equity Value, add Debt and Preferred Stock (and others), and subtract Cash

But WHY do you do any of that? What is the actual point of adding and subtracting different items?

Enterprise Value represents the value of the company's CORE BUSINESS OPERATIONS to ALL THE INVESTORS
in the company - equity, debt, preferred stock, etc.

So you want to focus on OPERATIONAL ITEMS and ALL INVESTORS when thinking about what to include
and what to exclude!

The 3 Rules of Thumb for the Enterprise Value Calculation

1. Is this item a long-term funding source for the company? In other words, will the funds we raise from
this item help fund our business for years to come?

If so, you should be adding this item when calculating Enterprise Value!

Examples: Debt, Preferred Stock, Noncontrolling Interests (Minority Interests), Capital Leases,
Unfunded Pension Obligations, Restructuring/Environmental Liabilities

2. Will this item cost an acquirer of the company something extra when they go to buy it?

And is it NOT something that will be repaid out of the company's normal cash flows (e.g., Accounts Payable)?

If so, add it when calculating Enterprise Value!

Examples: Debt and Preferred Stock.

3. Is this item NOT an operating asset? Ways to think about this:

a) In other words, could the company continue to operate even without this particular asset and be fine?

b) Did the company get this item NOT as a result of its core business, but rather "side activities" (e.g., real estate assets)?

If so, subtract it when calculating Enterprise Value!

(These items also often "save the acquirer money" when buying the company.)

Examples: Cash, Liquid Investments, Net Operating Losses, Assets Held for Sale, Assets from Discontinued Operations

How Do You Find These Items?

Most of the time, you look to the most recent Balance Sheet to figure out what should be added or subtracted.
 It's better to get the market value of these items when possible, but 99% of the time it is not possible, so the "book values
on the Balance Sheet are used instead.

But not EVERYTHING included in Enterprise Value appears explicitly on the Balance Sheet.

Most common case: Items are embedded within other items (Pensions, Capital Leases, Restructuring/Legal Liabilities).

Also: Sometimes, items won't appear on the Balance Sheet at all and you need to search the footnotes to find them.
Much less common these days after IASB/FASB rule changes, but still happens sometimes.

Overall Process: Get a company's most recent annual report, and its most recent interim report for Q1, Q2, Q3, etc.
If no interim reports have been issued yet since Q4 just ended, just use the annual report.

Then, take the basic share count from the most recent of those reports, and get all the option / warrant / RSU / other
information from the most recent report if it's not in the interim report, look in the annual report.

Calculate the diluted shares outstanding based on that information.

Then, get the company's most recent Balance Sheet and decide whether each item should be added or subtracted (or mak
no impact at all) when moving from Equity Value to Enterprise Value.

When you're done, check the Notes to the statements to find items like Pensions, Capital Leases, Restructuring/Legal Liabil
and so on - again, often these will be ONLY in the annual report (10-K for US-based companies).

Use the 3 rules of thumb to decide what to add/subtract (long-term funding source?, costs an acquirer extra?, non-operati

Does it need to be this difficult / time-consuming? No! Many ways to simplify it just depends on the time available and h
much detail you need. For example, you could take a company's diluted shares from its interim report instead of calculatin
yourself and skip the footnotes for Enterprise Value and get a lot of the numbers automatically from other data sources

Vivendi SA - Equity Value, Enterprise Value, and Financial Data: Balance Sheet:

Diluted Equity Value: 25,356

Less: Cash & Cash-Equivalents: (868) Assets:
Less: Other Liquid Investments & Cash-Like Items: (659) Current Assets:
Less: Equity Investments: (290) Cash:
Less: Other Non-Core Assets, Net: (17,983) Current Financial Assets:
Less: Value of Net Operating Losses (NOLs): - Accounts Receivable:
Plus: Total Debt: 12,243 Current Content Assets:
Plus: Preferred Stock: - Current Tax Receivables:
Plus: Noncontrolling Interests: 1,659 Inventory:
Plus: Unfunded Pension Obligations: 674 Assets Held for Sale:
Plus: Capital Leases: - Assets of Discontinued Businesses:
Plus: Restructuring & Legal Liabilities: 2,849 Total Current Assets:
Enterprise Value: 22,981
Non-Current Assets:
Recap and Key Points: Property, Plant & Equipment:
 Goodwill:
Rules of Thumb for Adding Items: Other Intangible Assets:
Non-Current Content Assets:
1. Is it a long-term funding source for the company? Investments in Equity Affiliates:
Non-Current Financial Assets:
2. Does it cost the acquirer extra when it buys the company? Deferred Tax Assets:
Total Non-Current Assets:
Rule of Thumb for Subtracting Items:
Total Assets:
3. Is it a non-operating asset? If so, subtract it.
 Liabilities & Equity:
How Does Each Item Above Meet This Criteria? Current Liabilities:
Short-Term Debt and Borrowings:
Cash - Non-operating asset, the company doesn't "need" it to run Accounts Payable:
its business beyond a certain small, minimum level. Current Tax Payables:
Current Provisions:
Liquid Investments - Also non-operating, the company has no need Liabilities of Discontinued Businesses
to invest in the stock market in order to make TV shows or movies. Total Current Liabilities:

Equity Investments - Non-operating, not recorded in this company's Non-Current Liabilities:

revenue/expenses, don't "need" it to run the business. Long-Term Debt and Borrowings:
Deferred Tax Liabilities:
Other Non-Core Assets - Typically items that will be sold off or Non-Current Provisions:
discontinued soon, so they're the definition of "non-core." Other Non-Current Liabilities:
Total Non-Current Liabilities:
NOLs - Also non-operating since long-term tax savings from these
are not required to run the business. Total Liabilities:

Debt - Long-term funding source, and an acquirer has to repay it. Equity:
Shareholders' Equity:
Preferred Stock - Long-term funding source, and an acquirer Share Capital:
has to repay it. Additional Paid-In Capital:
Treasury Shares:
Noncontrolling Interests - Long-term funding source, but this one's Retained Earnings and Other:
mostly for comparability company has recorded 100% of revenue Total Shareholders' Equity:
and expenses from this company, so we want to capture 100% of its Noncontrolling Interests:
value as well (see the dedicated lesson on this one). Total Equity:

Unfunded Pension Obligations - Long-term funding source! Total Liabilities & Equity:
"Work for us now, we'll pay you a bit less, but we'll take care of you
when you retire! Really!" BALANCE CHECK:
To the company, very much like super-long-term debt.
Plus, acquirer has to pay for these somehow

Capital Leases - Also a long-term funding source, sort of like debt

used to fund PP&E used to fund operations and must be repaid.

Restructuring & Legal Liabilities - Increases the cost to an acquirer,

and they are also "long-term funding" of a sort - "Instead of paying
for these expenses right now, we'll take care of them long into the
future and reflect that liability."

The Bottom-Line: The Enterprise Value calculation is always somewhat

subjective, and you'll see it done different ways.

Everyone agrees on certain items (Cash, Debt, Preferred Stock), but the
treatment of others varies by group, firm, industry, etc.
As long as you can justify and explain how you calculated it, you'll be fine -
even if someone else wants to change it later.

To do that, keep in mind the 3 key rules of thumb above.

 and subtract Cash

.g., real estate assets)?

ntinued Operations

or subtracted.
 ble, so the "book values"

ing/Legal Liabilities).

notes to find them.

r Q1, Q2, Q3, etc.

arrant / RSU / other

ed or subtracted (or make

Restructuring/Legal Liabilities,

uirer extra?, non-operating asset?).

n the time available and how

port instead of calculating it
from other data sources.

Q1 End:

868
21
2,227
981
636
99
1,230
25,025
31,087

3,209
 10,519
395
2,528
290
638
667
18,246

49,333
 3,934
5,213
105
272
8,272
17,796

8,309
685
2,715
205
11,914

29,710

7,368
8,381
(22)
2,237
17,964
1,659
19,623

49,333

OK!