WEBVTT 1 00:00:00.425 --> 00:00:03.285 In the previous module, we took full control 2 00:00:03.285 --> 00:00:07.045 of the target, which perfectly justified the global 3 00:00:07.315 --> 00:00:08.645 integration of accounts. 4 00:00:09.195 --> 00:00:11.485 However, it often happens 5 00:00:11.595 --> 00:00:13.965 that the takeover is effective but partial. 6 00:00:14.835 --> 00:00:18.605 It's this module we are going to consider a 70% stake, 7 00:00:19.055 --> 00:00:21.525 which gives us real control of the target 8 00:00:21.915 --> 00:00:24.645 with more than two thirds of the shares, 9 00:00:25.025 --> 00:00:27.565 but there are still shareholders of the target who, 10 00:00:28.405 --> 00:00:30.645 although now largely in the minority, 11 00:00:31.225 --> 00:00:32.805 pursue the capital adventure 12 00:00:33.065 --> 00:00:36.485 and remain partners as a group how to account 13 00:00:36.545 --> 00:00:37.765 for their ownership 14 00:00:38.225 --> 00:00:42.325 and contribution while providing relevant information 15 00:00:42.325 --> 00:00:45.645 to the analyst is a subject of the last method 16 00:00:45.905 --> 00:00:48.365 of consolidations that I will now develop. 17 00:00:48.825 --> 00:00:50.285 The financial characteristics 18 00:00:50.285 --> 00:00:52.245 of the transaction are quite the same. 19 00:00:52.585 --> 00:00:57.125 The only change is the investor takes a 70% stake instead 20 00:00:57.125 --> 00:01:01.365 of a 100% stake, no capital increase target 21 00:01:02.245 --> 00:01:04.045 investor and now shareholders are not 22 00:01:04.045 --> 00:01:05.605 selling all their shares. 23 00:01:05.605 --> 00:01:08.885 They're selling part of their shares, 70% of their shares. 24 00:01:08.885 --> 00:01:12.085 This is why the cash disbursement for the investor is going 25 00:01:12.085 --> 00:01:13.405 to be not 100%, 26 00:01:13.785 --> 00:01:17.605 but 70% of 300, which is 210. 27 00:01:18.265 --> 00:01:20.085 The operation business as usual, 28 00:01:20.185 --> 00:01:23.685 is carried out on the 1st of January of year n plus one. 29 00:01:24.465 --> 00:01:27.245 We are going to keep the same process for the presentation 30 00:01:27.905 --> 00:01:30.525 for the balance sheet on the 1st of January n plus one. 31 00:01:30.995 --> 00:01:32.245 Exactly. At the moment, 32 00:01:32.425 --> 00:01:34.605 the equity stake is taken by the investor. 33 00:01:35.115 --> 00:01:37.925 Then the impact of this equity stake, of this equity 34 00:01:38.485 --> 00:01:39.845 participation on the p 35 00:01:39.845 --> 00:01:42.605 and l, on the cashflow statement of the investor, 36 00:01:43.225 --> 00:01:45.805 and we are going to build the balance sheet on the 37 00:01:45.805 --> 00:01:49.405 31st of December n plus one when the year is over. 38 00:01:50.385 --> 00:01:52.485 Now, the economic characteristics 39 00:01:52.525 --> 00:01:54.725 of the operation are quite the same. 40 00:01:55.435 --> 00:01:56.485 It's a subsidiary. 41 00:01:56.555 --> 00:01:58.685 It's not a fully owned subsidiary, 42 00:01:58.745 --> 00:02:00.205 but it's still a subsidiary. 43 00:02:00.635 --> 00:02:04.125 It's not an equity stake, which is consolidated according 44 00:02:04.145 --> 00:02:05.245 to the equity method. 45 00:02:05.395 --> 00:02:06.805 It's not a simple investment. 46 00:02:07.035 --> 00:02:11.125 It's really a subsidiary which is integrated on a strategic 47 00:02:11.225 --> 00:02:12.765 and an operational point of view. 48 00:02:13.345 --> 00:02:15.365 Of course, there is still a legal barrier 49 00:02:15.365 --> 00:02:17.925 because these are two different companies on a legal point 50 00:02:17.925 --> 00:02:20.925 of view, but there is no economic barrier. 51 00:02:21.865 --> 00:02:25.765 Now, what is really interesting in the process is when we 52 00:02:25.765 --> 00:02:28.565 build the balance sheet on the first of Jerry, we are going 53 00:02:28.565 --> 00:02:33.365 to integrate 100% of the net assets paid 54 00:02:33.385 --> 00:02:35.045 by cash and we are going 55 00:02:35.045 --> 00:02:39.205 to observe the changes in assets on the one hand, equity 56 00:02:39.305 --> 00:02:41.205 and liabilities on the other hand, 57 00:02:41.545 --> 00:02:43.525 but the question is why do we integrate? 58 00:02:43.525 --> 00:02:47.205 100% of the net assets are not say 70%. 59 00:02:47.985 --> 00:02:50.965 The reason is there is no economic barrier. 60 00:02:51.985 --> 00:02:55.005 You are not taking 70% of the decisions. 61 00:02:55.665 --> 00:02:58.485 The decisions you are taking are not affecting 62 00:02:58.555 --> 00:03:00.285 70% of the company. 63 00:03:01.025 --> 00:03:02.605 You take all the decisions 64 00:03:02.945 --> 00:03:06.725 and all your decisions are impacting the whole company, 65 00:03:07.105 --> 00:03:08.605 100% of the net assets. 66 00:03:08.875 --> 00:03:12.485 This is why even though you have only 70% of the shares, 67 00:03:12.945 --> 00:03:14.845 you control 100% 68 00:03:15.025 --> 00:03:19.405 and then it leads to full integration by 100%. 69 00:03:20.735 --> 00:03:22.955 Now, if we look at the asset side of the balance sheet, 70 00:03:23.015 --> 00:03:26.235 we integrate the tangible fixed assets, all of them. 71 00:03:26.775 --> 00:03:30.355 We integrate 100% of the brands and goodwill. 72 00:03:30.655 --> 00:03:33.395 You don't own 70% of the brand. 73 00:03:33.615 --> 00:03:35.915 You own 100% of the brand. 74 00:03:36.465 --> 00:03:38.755 Then you integrate 100% of inventories 75 00:03:38.755 --> 00:03:41.515 and accounts receivable and other current operating assets. 76 00:03:41.515 --> 00:03:44.715 What about cash? Now, what happened to the cash situation 77 00:03:44.715 --> 00:03:46.755 of the company before the operation? 78 00:03:46.815 --> 00:03:50.755 Before the investment, we have 500 in the bank account. 79 00:03:51.175 --> 00:03:55.395 We cash out 210 to buy the 70% of the target 80 00:03:56.055 --> 00:03:59.515 and then we integrate 100% of the cash account 81 00:03:59.575 --> 00:04:03.635 of the target, which is 60 total assets, 2000. 82 00:04:04.455 --> 00:04:05.755 Now let's move to the equity 83 00:04:05.775 --> 00:04:07.635 and liability side of the balance sheet. 84 00:04:08.185 --> 00:04:10.315 There's no change in the shareholder's equity 85 00:04:10.665 --> 00:04:12.795 because there is no capital issue. 86 00:04:13.335 --> 00:04:15.555 We integrate 100% of the long-term 87 00:04:15.815 --> 00:04:17.675 and short-term financial debt of the target. 88 00:04:18.135 --> 00:04:21.235 We integrate the operating liabilities, accounts payable 89 00:04:21.335 --> 00:04:23.115 and other current operating liabilities, 90 00:04:23.535 --> 00:04:25.995 and we calculate the sum of equity and liabilities. 91 00:04:26.255 --> 00:04:28.835 We get 1,910, 92 00:04:28.965 --> 00:04:33.355 which is quite different from the 2000 we were observing 93 00:04:33.915 --> 00:04:35.715 building the asset side of the balance sheet. 94 00:04:36.135 --> 00:04:39.195 Now of course there is a full integration of the accounts, 95 00:04:39.245 --> 00:04:40.875 which is due to control, 96 00:04:41.575 --> 00:04:44.355 but 30% of the shares remain the property 97 00:04:44.495 --> 00:04:45.835 of the shareholders. 98 00:04:45.985 --> 00:04:48.275 They are now minority shareholders, 99 00:04:48.575 --> 00:04:50.155 but they are still shareholders 100 00:04:50.535 --> 00:04:53.755 and involved in the ownership of the target. 101 00:04:54.945 --> 00:04:59.315 This equity stake is worth 30% of 300, 102 00:04:59.565 --> 00:05:00.635 which is 90. 103 00:05:01.495 --> 00:05:03.195 Now we can build the equity 104 00:05:03.215 --> 00:05:05.075 and liability side of the balance sheet 105 00:05:05.135 --> 00:05:08.035 and there will be a very significant modification 106 00:05:09.255 --> 00:05:11.515 not on the shareholders' equity group share. 107 00:05:11.515 --> 00:05:15.435 Group share means what was invested by the shareholders 108 00:05:15.895 --> 00:05:17.435 of the parent company. 109 00:05:18.215 --> 00:05:21.235 No change 900 because there's no capital increase, 110 00:05:22.015 --> 00:05:24.155 but there will be an additional part 111 00:05:24.155 --> 00:05:27.395 of the shareholders' equity consolidated, 112 00:05:28.245 --> 00:05:29.755 which is minority interest. 113 00:05:30.215 --> 00:05:32.755 Of course, there is full integration due to control, 114 00:05:32.895 --> 00:05:36.995 but 30% of the targets still belong to its former owners. 115 00:05:37.405 --> 00:05:39.315 There are minority shareholders, 116 00:05:39.655 --> 00:05:43.755 but their equity stake can be validated at 30% of 117 00:05:43.755 --> 00:05:47.035 what you're ready to pay for the whole company, which is 90. 118 00:05:48.705 --> 00:05:51.675 They are a compliment to the group equity. 119 00:05:52.015 --> 00:05:53.795 Of course, they are not group equity 120 00:05:53.795 --> 00:05:55.235 because it's not about the shareholders 121 00:05:55.535 --> 00:05:56.755 or the parent company. 122 00:05:57.515 --> 00:05:59.365 It's about the remaining shareholders 123 00:05:59.825 --> 00:06:01.725 of the control company, 124 00:06:02.225 --> 00:06:05.125 but they still hold a right on the net asset 125 00:06:05.135 --> 00:06:06.685 value of the target. 126 00:06:07.035 --> 00:06:10.045 They remain invested in the target company. 127 00:06:10.475 --> 00:06:12.405 They are contributing to the financing 128 00:06:12.425 --> 00:06:13.645 of the target company. 129 00:06:14.035 --> 00:06:16.845 They are still co-owners of the target company. 130 00:06:17.395 --> 00:06:20.565 Shareholders' equity represent the ownership 131 00:06:20.745 --> 00:06:23.685 and the investment, so they have to contribute to their 132 00:06:24.285 --> 00:06:26.245 consolidated shareholders' equity. 133 00:06:27.075 --> 00:06:30.165 Then we add a line in the consolidated shareholders' equity. 134 00:06:30.425 --> 00:06:32.285 We add minority interest 135 00:06:32.505 --> 00:06:36.485 or non-controlling interest through the group share 136 00:06:36.485 --> 00:06:40.765 of shareholders equity, and the sum is 990. 137 00:06:41.825 --> 00:06:43.565 No change in the rest of the balance sheet, 138 00:06:43.565 --> 00:06:46.525 but at the end of the day, how much do you get 2000 139 00:06:47.305 --> 00:06:49.685 and why is now the balance sheet balancing? 140 00:06:49.685 --> 00:06:53.325 Because we have taken into account the contribution, 141 00:06:53.425 --> 00:06:57.085 the remaining holding of the minority shareholders 142 00:06:57.145 --> 00:07:00.085 of the target in the financing of the net assets. 143 00:07:00.425 --> 00:07:02.365 Now, once we've built the balance sheet on the 144 00:07:02.365 --> 00:07:03.925 1st of January and plus one 145 00:07:04.095 --> 00:07:05.805 after the equity stake, 146 00:07:06.145 --> 00:07:08.525 we can now build the income statement 147 00:07:08.625 --> 00:07:10.325 and cashflow statement for the year. 148 00:07:10.715 --> 00:07:13.605 Same principles, we add sales, cost of sales, 149 00:07:13.605 --> 00:07:16.765 investment changes in working capital requirement, 150 00:07:17.065 --> 00:07:21.645 et cetera, et cetera, and we remove the intra-group flows. 151 00:07:22.665 --> 00:07:24.685 Now, we are going to calculate the net income, 152 00:07:24.975 --> 00:07:29.605 which is a bottom line as if the target was fully owned 153 00:07:29.865 --> 00:07:34.085 by the investor, but still there is part of the net income 154 00:07:34.085 --> 00:07:37.765 of the target, which does not belong to the parent company. 155 00:07:38.185 --> 00:07:40.565 30% of them, so we'll have 156 00:07:40.565 --> 00:07:44.565 to remove from the consulated net income the shares 157 00:07:44.565 --> 00:07:46.765 that goes to the minority shareholders 158 00:07:47.185 --> 00:07:49.445 to the non-controlling investors. 159 00:07:50.275 --> 00:07:54.925 They own 30% of the result of the bottom line of the target. 160 00:07:55.425 --> 00:07:58.605 Second change we have to take into account the share 161 00:07:58.625 --> 00:08:01.125 of the dividend, which is paid by the target 162 00:08:01.265 --> 00:08:02.845 to the minority investors. 163 00:08:03.785 --> 00:08:06.885 We don't take into account the dividend, which is paid 164 00:08:06.905 --> 00:08:09.405 by the target to the parent company 165 00:08:09.515 --> 00:08:11.325 because of consolidation. 166 00:08:11.585 --> 00:08:14.325 We remove intra group flows 167 00:08:14.715 --> 00:08:18.125 because this dividend is cash out for one part of the group 168 00:08:18.185 --> 00:08:19.965 and cash in for the other part of the group. 169 00:08:20.275 --> 00:08:22.005 They just net each other, 170 00:08:22.545 --> 00:08:25.365 but what about the 30% of the dividend of the target, 171 00:08:25.575 --> 00:08:28.125 which is paid to outside shareholders? 172 00:08:28.625 --> 00:08:30.045 The amount is leaving the group 173 00:08:30.465 --> 00:08:31.485 and then we have to take 174 00:08:31.485 --> 00:08:34.605 that into account in a cashflow statement of the group. 175 00:08:35.425 --> 00:08:37.965 Now, let's start with a p and l. The income statement. 176 00:08:38.025 --> 00:08:40.565 For your n plus one, you understand 177 00:08:40.565 --> 00:08:42.005 that the bottom line is the same. 178 00:08:42.665 --> 00:08:47.005 The bottom line is 132, so 100% of the net income generated 179 00:08:47.105 --> 00:08:49.605 by the investor, the purchasing company 180 00:08:49.865 --> 00:08:52.925 and the target represent 132, 181 00:08:53.665 --> 00:08:57.085 but out of this 132, there are 30% 182 00:08:57.185 --> 00:08:59.405 of the net income generated by the target, 183 00:08:59.815 --> 00:09:03.725 which does not belong to the shareholders of the group 184 00:09:03.745 --> 00:09:04.885 of the parent company. 185 00:09:05.785 --> 00:09:09.285 You remember that the net income was 60, 30% of 60 186 00:09:09.905 --> 00:09:11.685 do not belong to the group. 187 00:09:12.395 --> 00:09:17.165 It's exactly 18, so the net earnings group share is 188 00:09:17.165 --> 00:09:21.725 what has been generated by the group as the whole 132 minus 189 00:09:22.155 --> 00:09:25.765 what does not belong to the parent company 18 190 00:09:25.795 --> 00:09:29.765 because it belongs to it is generated for the 191 00:09:30.525 --> 00:09:32.485 minority shareholders of the target company. 192 00:09:33.035 --> 00:09:37.205 Then the net earnings group share are 114. 193 00:09:37.955 --> 00:09:39.205 It's about the same story 194 00:09:39.385 --> 00:09:41.805 for the cashflow statement year end plus one 195 00:09:42.315 --> 00:09:43.365 same construction. 196 00:09:43.365 --> 00:09:44.565 For the cashflow statement, 197 00:09:45.065 --> 00:09:47.925 we add the free cash flows generated respectively 198 00:09:48.065 --> 00:09:51.965 by the parent company on the target and the subsidiary. 199 00:09:52.585 --> 00:09:54.685 It accounts for 79, 200 00:09:55.305 --> 00:09:58.365 but you remember that a dividend is paid by the target 201 00:09:58.825 --> 00:09:59.925 to the parent company. 202 00:10:00.545 --> 00:10:02.045 The dividend is 40, 203 00:10:02.705 --> 00:10:06.925 but what is going to stay within the group is 70% of 40. 204 00:10:07.315 --> 00:10:12.165 What is going to leave the group is 30% of 40 205 00:10:12.165 --> 00:10:15.805 because this dividend is paid to the minority shareholders 206 00:10:16.065 --> 00:10:19.085 who do not belong to the group, so we have 207 00:10:19.085 --> 00:10:20.245 to take into account the fact 208 00:10:20.245 --> 00:10:22.565 that this cash is leaving the group. 209 00:10:22.665 --> 00:10:25.565 30% of 40 is 12, how much is left? 210 00:10:25.635 --> 00:10:28.205 What is the change in cash position for the group? 211 00:10:28.515 --> 00:10:30.205 It's only 67 212 00:10:31.025 --> 00:10:32.965 before we build the balance sheet at the end 213 00:10:32.965 --> 00:10:34.045 of year n plus one. 214 00:10:34.095 --> 00:10:38.005 There are two fundamental technical dimensions which 215 00:10:38.085 --> 00:10:39.165 I would like to address. 216 00:10:40.265 --> 00:10:41.965 The first one is about equity 217 00:10:42.465 --> 00:10:46.725 and it's equivalent net assets with two perspectives, 218 00:10:47.075 --> 00:10:49.965 ownership on one side, investment on the other side. 219 00:10:50.545 --> 00:10:53.885 The second one is about the two dividend lines, 220 00:10:53.975 --> 00:10:56.725 which you are going to read in a cashflow statement. 221 00:10:56.995 --> 00:10:59.125 They both represent dividends, 222 00:10:59.505 --> 00:11:01.125 but the nature is absolutely 223 00:11:01.125 --> 00:11:02.325 different from one to the other. 224 00:11:02.775 --> 00:11:05.565 Let's start with equity, net assets, 225 00:11:05.955 --> 00:11:07.445 ownership and financing. 226 00:11:08.275 --> 00:11:10.805 What is very interesting in an accounting point of view is 227 00:11:10.805 --> 00:11:12.965 that equity represents, 228 00:11:13.305 --> 00:11:16.085 on the one hand the ownership of net assets. 229 00:11:16.425 --> 00:11:18.565 The shareholders are the owners of the company, 230 00:11:19.425 --> 00:11:20.525 but on the other hand, 231 00:11:20.825 --> 00:11:23.485 the equity also represents a contribution 232 00:11:24.145 --> 00:11:26.085 of these shareholders, so the financing 233 00:11:26.085 --> 00:11:27.405 of the business and operations. 234 00:11:27.945 --> 00:11:30.245 So you understand that there are two perspectives which are 235 00:11:30.245 --> 00:11:32.045 very complimentary, one to the other. 236 00:11:33.145 --> 00:11:34.205 Now we have to show 237 00:11:34.635 --> 00:11:37.805 that there is an increase in an net asset, which is owned 238 00:11:37.905 --> 00:11:41.165 by the shareholders, but it's counterpart, 239 00:11:41.165 --> 00:11:45.045 which is the increase in equity, demonstrate 240 00:11:45.045 --> 00:11:47.925 that the shareholders have contributed to the financing 241 00:11:48.355 --> 00:11:50.885 through the increase in the retain earnings. 242 00:11:51.425 --> 00:11:53.885 You remember net earnings minus dividends 243 00:11:53.885 --> 00:11:57.045 because in my case, there is no capital increase. 244 00:11:57.675 --> 00:11:59.005 This dual perspective 245 00:11:59.305 --> 00:12:03.085 of equity has a significant impact on the construction 246 00:12:03.185 --> 00:12:05.245 of the consolidated balance sheet 247 00:12:05.905 --> 00:12:10.405 and specifically on the reevaluation of minority interests. 248 00:12:11.425 --> 00:12:13.885 To build a balance sheet, let's start with the asset side 249 00:12:13.885 --> 00:12:16.325 of the balance sheet, which is quite simple. 250 00:12:17.345 --> 00:12:19.845 We integrate all the operate, 251 00:12:21.425 --> 00:12:23.405 we integrate all the operating assets 252 00:12:23.625 --> 00:12:26.205 and we can observe that there was a change in each 253 00:12:26.305 --> 00:12:28.845 and every item from the beginning to the end of the year, 254 00:12:29.585 --> 00:12:32.285 except for the intangible fixed assets which remain 255 00:12:32.285 --> 00:12:35.765 unchanged at 240 as far as cash 256 00:12:36.025 --> 00:12:38.085 as a non-operating asset is concerned, 257 00:12:38.425 --> 00:12:41.205 we observe the integration of the free cash flow, 258 00:12:41.665 --> 00:12:44.525 but the free cash flow net of the dividend paid 259 00:12:44.625 --> 00:12:47.285 by the target to the minority interest, 260 00:12:48.265 --> 00:12:53.165 so we have calculated 67 as a net changing cash position. 261 00:12:53.735 --> 00:12:58.565 67 plus 350 is 417 total 262 00:12:58.565 --> 00:13:01.525 balance sheet 2,156. 263 00:13:01.835 --> 00:13:05.005 Once the asset side of the balance sheet is built, we have 264 00:13:05.005 --> 00:13:07.045 to move to equity and liabilities 265 00:13:08.185 --> 00:13:10.485 and then we have to take into account the fact that 266 00:13:10.665 --> 00:13:14.445 of course there's global integration which is due 267 00:13:14.445 --> 00:13:19.005 to the control, but 30% of the target shares remain owned 268 00:13:19.305 --> 00:13:23.245 by the minority, the non-controlling investors. 269 00:13:24.115 --> 00:13:27.205 This is a perspective ownership of equity. 270 00:13:28.025 --> 00:13:30.755 This was the ownership perspective of the equity, 271 00:13:31.415 --> 00:13:33.395 but the second one is about financing 272 00:13:34.215 --> 00:13:35.595 the minority shareholders. 273 00:13:35.985 --> 00:13:37.435 They are still on stage 274 00:13:37.855 --> 00:13:40.475 and they contribute to the financing of the net asset, 275 00:13:41.145 --> 00:13:44.035 including the financing of net asset growth. 276 00:13:44.495 --> 00:13:45.755 How do they contribute 277 00:13:45.985 --> 00:13:49.355 through their participation in the growth of the targets? 278 00:13:49.675 --> 00:13:50.715 Retained earnings. 279 00:13:51.785 --> 00:13:53.795 When the target is generating a profit 280 00:13:54.055 --> 00:13:58.195 and is distributing part of its profit, it is contributing 281 00:13:58.195 --> 00:14:01.795 to their financing of the asset growth of their target 282 00:14:02.535 --> 00:14:04.875 by the incremental retain earnings. 283 00:14:05.695 --> 00:14:09.035 Now, the minority shareholders, they contribute to 30% 284 00:14:09.135 --> 00:14:10.675 of this contribution. 285 00:14:11.135 --> 00:14:13.715 It has to show somewhere in the balance sheet. 286 00:14:14.385 --> 00:14:16.435 This is why when we build the equity 287 00:14:16.455 --> 00:14:19.555 and liability side of the consolidated group, 288 00:14:20.385 --> 00:14:21.875 what do we take into account? 289 00:14:22.235 --> 00:14:25.715 Shareholders equity group share is incremented 290 00:14:25.855 --> 00:14:29.955 by the net earnings group share generated by the company 291 00:14:31.055 --> 00:14:33.235 the long term and short term financial 292 00:14:33.305 --> 00:14:34.515 debt accounts payable. 293 00:14:34.515 --> 00:14:38.235 Other current operating liabilities are consolidated exactly 294 00:14:38.375 --> 00:14:42.115 the same way as when we own 100% of the shares, 295 00:14:42.115 --> 00:14:43.835 but what about the minority interest? 296 00:14:44.135 --> 00:14:46.195 The minority shareholders are contributing 297 00:14:46.195 --> 00:14:48.475 to the financing of their target. 298 00:14:49.535 --> 00:14:54.365 Up to the level of 30% as a target is reinvesting one third 299 00:14:54.425 --> 00:14:55.525 of its net income. 300 00:14:55.985 --> 00:14:59.725 You remember net income is 60, dividend is two thirds of 60, 301 00:15:00.305 --> 00:15:02.165 so they retain earnings are 20. 302 00:15:02.985 --> 00:15:04.365 The shareholders as a target. 303 00:15:04.635 --> 00:15:07.645 They contribute to the financing of the target by 20. 304 00:15:08.395 --> 00:15:09.925 What is the share which is 305 00:15:10.405 --> 00:15:12.205 provided by the minority shareholders? 306 00:15:12.505 --> 00:15:17.325 30%. Their equity stake multiplied by 20, 30% 307 00:15:17.325 --> 00:15:19.525 of 60 minus 40 is six. 308 00:15:20.105 --> 00:15:22.525 It is a contribution of the minority shareholders 309 00:15:22.525 --> 00:15:24.005 through the financing of the target. 310 00:15:24.915 --> 00:15:29.095 Now, when we reevaluate the minority interest 311 00:15:30.115 --> 00:15:33.095 by the contribution of the minority shareholders 312 00:15:33.395 --> 00:15:37.375 to the financing of the target through retain earnings, 313 00:15:38.035 --> 00:15:42.615 so the 90 becomes 96, we use exactly the same method 314 00:15:42.795 --> 00:15:46.535 as the one we were using when we were consolidating the 315 00:15:46.615 --> 00:15:47.655 financial fixed assets. 316 00:15:47.655 --> 00:15:49.415 According to the equity method, 317 00:15:50.195 --> 00:15:51.935 we use the same equity method 318 00:15:52.075 --> 00:15:56.575 to reevaluate the minority interest when the target company 319 00:15:57.035 --> 00:15:59.735 is generating a profit and paying a dividend. 320 00:16:00.155 --> 00:16:01.575 Now we have completed the equity 321 00:16:01.575 --> 00:16:02.975 and liability side of the penalty. 322 00:16:03.555 --> 00:16:06.535 We calculate the equity group share, 323 00:16:06.835 --> 00:16:08.975 we add the minority interest to get the 324 00:16:09.535 --> 00:16:11.055 consolidated shareholders' equity. 325 00:16:11.955 --> 00:16:14.335 We add the long term and short term financial debt. 326 00:16:14.395 --> 00:16:16.535 We add the operating liabilities 327 00:16:16.715 --> 00:16:19.535 and we get 2,156, which matches 328 00:16:19.645 --> 00:16:21.615 with the asset side of the balance sheet. 329 00:16:21.995 --> 00:16:25.735 Second technical dimension, the two dividend lines. 330 00:16:25.875 --> 00:16:28.455 In a cashflow statement, you remember 331 00:16:28.455 --> 00:16:31.175 that the assumption was from the very beginning in order 332 00:16:31.195 --> 00:16:32.695 to simplify the calculation 333 00:16:32.695 --> 00:16:34.815 that the parent company was not paying 334 00:16:34.915 --> 00:16:36.255 any dividend to its shareholders. 335 00:16:37.315 --> 00:16:38.415 Now we are going to change 336 00:16:38.915 --> 00:16:40.535 and adopt a new hypothesis, 337 00:16:40.535 --> 00:16:43.975 which is a parent company decides to per dividend equal 338 00:16:44.035 --> 00:16:47.455 to 40 to its own group shareholders. 339 00:16:48.645 --> 00:16:51.415 What will be the impact on the cashflow statement? 340 00:16:51.645 --> 00:16:54.295 When you build the cashflow statement, there is no change up 341 00:16:54.295 --> 00:16:56.815 to the moment you calculate the free cashflow. 342 00:16:57.005 --> 00:16:58.335 It's still 79. 343 00:16:59.075 --> 00:17:02.535 Now, we'll have to take into account two cash outflows, 344 00:17:02.825 --> 00:17:05.135 which are two dividend outflows, 345 00:17:05.795 --> 00:17:07.575 but they are of very different nature. 346 00:17:08.195 --> 00:17:10.335 The first one is a dividend, which is distributed 347 00:17:10.395 --> 00:17:11.455 by the parent company 348 00:17:11.635 --> 00:17:13.855 to its shareholders, and you remember that. 349 00:17:13.995 --> 00:17:15.815 Now, we took as a hypothesis 350 00:17:15.815 --> 00:17:17.655 that the company is distributing 40. 351 00:17:18.285 --> 00:17:20.295 This is cash for the group, 352 00:17:20.635 --> 00:17:22.135 but there is another dividend, 353 00:17:22.225 --> 00:17:24.055 which is a cash out for the company. 354 00:17:24.555 --> 00:17:27.135 It is a part of the dividend which was distributed 355 00:17:27.355 --> 00:17:29.735 by the target, not to the parent company, 356 00:17:29.955 --> 00:17:33.215 but to the minority shareholders to the minority interest. 357 00:17:33.835 --> 00:17:38.495 So we have two cash out. One is 40, the second one is 12. 358 00:17:38.835 --> 00:17:43.655 The change in cash position is 79 minus these two dividends, 359 00:17:43.705 --> 00:17:45.535 which is 27, 360 00:17:46.235 --> 00:17:49.605 but you understand that there might be some confusion when 361 00:17:49.605 --> 00:17:51.165 you read a cashflow statement. 362 00:17:51.665 --> 00:17:55.205 The fact that there are two dividend lines is exactly the 363 00:17:55.205 --> 00:17:57.205 consequence of the group perspective. 364 00:17:58.005 --> 00:18:02.365 A cashflow statement is inflows minus outflows. 365 00:18:03.065 --> 00:18:05.885 Now, there are two dividend outflows 366 00:18:06.025 --> 00:18:07.845 of two different natures. 367 00:18:08.545 --> 00:18:11.685 The distinction between these two dividend lines has a very 368 00:18:11.755 --> 00:18:15.325 significant impact on a cashflow analysis 369 00:18:15.625 --> 00:18:18.365 of the group consolidated group. 370 00:18:19.555 --> 00:18:21.645 When you analyze the evolution of the cash, 371 00:18:21.645 --> 00:18:24.245 which is generated by the group, you understand 372 00:18:24.245 --> 00:18:27.485 that these dividends are of completely different natures. 373 00:18:28.465 --> 00:18:31.205 One is very much what does not belong to you, 374 00:18:31.705 --> 00:18:33.605 and the other one is a remuneration 375 00:18:33.905 --> 00:18:35.845 of the shareholders of the parent company. 376 00:18:36.115 --> 00:18:39.325 This is completely different perspective, which has 377 00:18:39.325 --> 00:18:40.445 to be taken into account. 378 00:18:41.205 --> 00:18:42.805 A few comments before we get 379 00:18:42.805 --> 00:18:45.125 to the last point of this module. 380 00:18:46.305 --> 00:18:47.405 We are controlling. 381 00:18:48.025 --> 00:18:50.685 We are controlling with 70%, not 100%, 382 00:18:50.705 --> 00:18:51.765 but we are controlling. 383 00:18:51.955 --> 00:18:53.805 This leads to full integration. 384 00:18:54.905 --> 00:18:59.085 Now, part of the integrated net assets remains owned 385 00:18:59.085 --> 00:19:01.805 by investors who are no more the majority 386 00:19:02.465 --> 00:19:04.285 on full orders of the company. 387 00:19:04.955 --> 00:19:06.685 They have become a minority, 388 00:19:06.785 --> 00:19:08.525 but they have to be taken into account 389 00:19:08.525 --> 00:19:10.325 because they contribute to the life, 390 00:19:10.345 --> 00:19:12.045 to the development of the target. 391 00:19:12.975 --> 00:19:16.165 There are two accounting impacts of this statement. 392 00:19:16.815 --> 00:19:19.565 First, the p and l is going to be impacted by the fact 393 00:19:19.565 --> 00:19:21.885 that the net income grow share 394 00:19:22.585 --> 00:19:25.245 is not the net income consolidated. 395 00:19:25.905 --> 00:19:29.125 You have to take out of the consolidated net income, 396 00:19:29.305 --> 00:19:32.845 the part which is still owned by the minority shareholders. 397 00:19:33.635 --> 00:19:35.725 There's an impact in the cashflow statement 398 00:19:35.985 --> 00:19:38.765 and we have to take into account the part of the dividend, 399 00:19:38.765 --> 00:19:41.965 which is paid by the target, not to the parent company. 400 00:19:42.455 --> 00:19:43.805 Intra group flows, but 401 00:19:43.805 --> 00:19:46.285 to the external minority shareholders. 402 00:19:47.025 --> 00:19:49.805 We have also observed on an accounting point of view 403 00:19:50.235 --> 00:19:52.805 that we have to reevaluate the minority interest. 404 00:19:53.415 --> 00:19:55.965 These investors, they are still part of the story 405 00:19:56.025 --> 00:19:58.165 of the target and they contribute. 406 00:19:58.835 --> 00:20:01.245 They contribute, and the revaluation is going 407 00:20:01.245 --> 00:20:03.845 to use the same equity method 408 00:20:04.035 --> 00:20:07.405 that we were using when we were holding a significant equity 409 00:20:07.415 --> 00:20:10.485 stake in a company which was not controlled. 410 00:20:11.105 --> 00:20:13.245 Now, there's a last point I would like to address, 411 00:20:13.415 --> 00:20:17.925 which is about the financial leverage of the group 412 00:20:18.845 --> 00:20:19.845 consolidated group. 413 00:20:20.195 --> 00:20:22.085 What is a definition of the leverage? 414 00:20:22.465 --> 00:20:24.765 The financial leverage is calculated, 415 00:20:24.885 --> 00:20:27.725 dividing the net financial debt long term 416 00:20:28.235 --> 00:20:31.605 plus short term minus cash by the ebitda, 417 00:20:31.945 --> 00:20:33.885 the cash operating profit. 418 00:20:34.875 --> 00:20:39.845 Basically, it gives you years or months, how many months 419 00:20:39.945 --> 00:20:42.165 or years of EBITDA do you need 420 00:20:42.165 --> 00:20:45.245 to invest in the repayment in the redemption 421 00:20:45.245 --> 00:20:46.525 of the net financial debt? 422 00:20:46.985 --> 00:20:50.605 Of course, a financial leverage gives a very interesting 423 00:20:50.605 --> 00:20:54.285 information about the risk taken by the financial creditors. 424 00:20:55.065 --> 00:20:56.885 Now, we can calculate the financial 425 00:20:57.445 --> 00:20:59.485 leverage from the consolidated accounts, 426 00:21:00.105 --> 00:21:01.805 but in the consolidated accounts, 427 00:21:01.805 --> 00:21:03.045 what are you going to observe? 428 00:21:03.665 --> 00:21:06.605 The net financial debt, 100% of it. 429 00:21:06.905 --> 00:21:10.645 The ebitda, 100% of it, so the financial leverage, 430 00:21:10.645 --> 00:21:13.125 which is going to be calculated from the consolidated 431 00:21:13.125 --> 00:21:17.205 accounts is 100% of that financial debt divided by 100% 432 00:21:17.205 --> 00:21:20.765 of ebitda, but 30% of the net financial debt 433 00:21:21.305 --> 00:21:24.205 and 30% of the EBITDA should not be included. 434 00:21:24.265 --> 00:21:25.285 Is this calculation 435 00:21:25.835 --> 00:21:28.645 because they don't belong to the group, they are 436 00:21:29.075 --> 00:21:30.085 outside the group. 437 00:21:31.295 --> 00:21:34.485 Let's recompute their consolidated leverage 438 00:21:34.825 --> 00:21:37.045 and the real leverage 439 00:21:37.395 --> 00:21:41.765 with an exact calculation taking 100% of the parent company, 440 00:21:42.025 --> 00:21:45.285 the investor, and only 70% of their target. 441 00:21:46.255 --> 00:21:50.445 Let's first calculate the consolidated financial leverage. 442 00:21:51.485 --> 00:21:55.925 Consolidated net financial debt is 263. 443 00:21:56.475 --> 00:22:00.125 It's long term, 440 plus short term, 444 00:22:00.425 --> 00:22:03.645 240 minus cash, 470 445 00:22:05.025 --> 00:22:08.165 EBITDA consolidated directly comes from the p 446 00:22:08.165 --> 00:22:10.325 and l 394. 447 00:22:10.625 --> 00:22:14.645 We divide one by the other and we get 0.67. 448 00:22:15.425 --> 00:22:16.765 Now let's move to the calculation 449 00:22:16.765 --> 00:22:18.845 of the real financial leverage. 450 00:22:19.965 --> 00:22:24.085 Interestingly, the actual real net financial debt is quite 451 00:22:24.105 --> 00:22:28.445 the same because there is almost no net interest bearing 452 00:22:28.475 --> 00:22:30.205 debt in the balance sheet of the target, 453 00:22:31.225 --> 00:22:35.685 but the target company is very profitable, so it's a B, D. 454 00:22:35.685 --> 00:22:38.245 A contribution is quite significant to the group. 455 00:22:39.075 --> 00:22:41.485 Then if you calculate the EBDA, which is owned 456 00:22:41.505 --> 00:22:44.685 by the mother company, which includes 100% 457 00:22:44.685 --> 00:22:48.765 of the parent company and only 70% of the EBDA the target, 458 00:22:49.385 --> 00:22:51.245 we don't get 394. 459 00:22:51.465 --> 00:22:53.805 We get much less 366. 460 00:22:54.585 --> 00:22:59.365 Now, when you divide 261, which is quite the same as 263 461 00:23:00.025 --> 00:23:01.925 by 366, 462 00:23:01.975 --> 00:23:05.125 which is much less than 394, 463 00:23:05.665 --> 00:23:09.165 you get a significantly higher real financial 464 00:23:09.685 --> 00:23:11.125 leverage 0.71. 465 00:23:12.225 --> 00:23:15.725 Now you understand that 0.6 7.71. 466 00:23:16.155 --> 00:23:18.125 It's not a very dramatic situation, 467 00:23:18.545 --> 00:23:20.365 but we can transform the figures 468 00:23:20.585 --> 00:23:22.765 and get to a dramatic situation. 469 00:23:23.645 --> 00:23:25.005 I am going to propose you a new 470 00:23:25.005 --> 00:23:26.885 calculation changing two parameters. 471 00:23:27.815 --> 00:23:29.205 First, the equity stake 472 00:23:29.205 --> 00:23:32.925 of the parent company in the target is down from 70% 473 00:23:33.385 --> 00:23:34.445 to 60%. 474 00:23:34.865 --> 00:23:37.285 Second, I am going to significantly 475 00:23:38.125 --> 00:23:39.445 leverage the parent company. 476 00:23:40.505 --> 00:23:43.885 I'm going to replace in a retain earning 600 by 100, 477 00:23:44.345 --> 00:23:47.365 so I reduce the equity by 500. 478 00:23:48.265 --> 00:23:51.685 The 500 are going to show in the long-term financial debt, 479 00:23:51.685 --> 00:23:54.085 which is going to be incremented in my calculation 480 00:23:54.715 --> 00:23:56.325 from 400 to 900. 481 00:23:57.475 --> 00:23:59.765 What happens in the financial leverage calculation? 482 00:24:00.825 --> 00:24:04.045 It obviously significantly changes the figure. 483 00:24:04.825 --> 00:24:09.605 The consolidated net financial debt is now 756, 484 00:24:09.905 --> 00:24:14.365 and the consolidated EBDA is 394. 485 00:24:15.065 --> 00:24:16.365 Though at the end of the day, 486 00:24:16.505 --> 00:24:20.485 the consolidated financial leverage is 1.92. 487 00:24:21.315 --> 00:24:23.645 What about the real financial leverage? 488 00:24:24.385 --> 00:24:26.965 You understand that when the debt is in the parent company 489 00:24:27.385 --> 00:24:30.285 and a very big chunk of the EBITDA is generated 490 00:24:30.345 --> 00:24:31.645 by the subsidiary, 491 00:24:32.185 --> 00:24:33.965 the figures are going to be quite different. 492 00:24:34.545 --> 00:24:36.925 The actual net financial debt is quite the same 493 00:24:36.925 --> 00:24:38.845 as the consolidated net financial debt, 494 00:24:39.105 --> 00:24:42.565 but the EBITDA own is significantly down 495 00:24:42.915 --> 00:24:47.325 because I reduced the equity stake from 70 to 60. 496 00:24:48.115 --> 00:24:52.045 Then the real financial leverage is two point 11. 497 00:24:53.175 --> 00:24:56.835 It means that the financial leverage moves from consolidated 498 00:24:57.625 --> 00:25:01.315 less than two, 1.9, two two, real 499 00:25:01.945 --> 00:25:04.075 more than two, two point 11. 500 00:25:05.455 --> 00:25:07.035 Why might it be an issue 501 00:25:08.125 --> 00:25:10.895 when you raise debt from financial creditors? 502 00:25:11.275 --> 00:25:12.375 You write a contract. 503 00:25:12.715 --> 00:25:14.775 In the contract there are plenty of closes. 504 00:25:14.925 --> 00:25:16.975 Some of them are named covenants. 505 00:25:18.005 --> 00:25:20.975 Basically, a covenant describes the evolution of the roles 506 00:25:21.035 --> 00:25:22.455 and duties of the lender 507 00:25:22.755 --> 00:25:26.775 and the borrower when there are significant changes in the 508 00:25:26.775 --> 00:25:29.655 financial characteristics, in the financial statements 509 00:25:29.875 --> 00:25:31.295 of the borrowing company. 510 00:25:31.865 --> 00:25:35.615 Under some circumstances, a covenant might say 511 00:25:35.615 --> 00:25:39.295 that if the financial leverage goes up from less than two 512 00:25:39.395 --> 00:25:43.455 to more than two, there might be some changes in the level 513 00:25:43.475 --> 00:25:46.455 of interest which is paid by the borrowing company. 514 00:25:47.385 --> 00:25:51.335 Maybe the debt can become callable, not immediately, 515 00:25:51.795 --> 00:25:55.415 but sooner than anticipated in the initial contract, 516 00:25:55.465 --> 00:25:58.215 which puts very much a company at risk on a 517 00:25:58.215 --> 00:25:59.375 liquidity point of view. 518 00:26:00.275 --> 00:26:04.895 So you understand that calculating a real financial leverage 519 00:26:04.915 --> 00:26:07.175 as opposed to a consolidated one 520 00:26:07.775 --> 00:26:10.415 provides some extremely relevant information 521 00:26:10.435 --> 00:26:12.415 to the financial analyst. 522 00:26:13.005 --> 00:26:14.815 It's about the cost of financing. 523 00:26:14.965 --> 00:26:17.295 It's about the liquidity risk of the parent company. 524 00:26:17.795 --> 00:26:19.655 In this module, I have described 525 00:26:19.715 --> 00:26:22.255 how you consolidate the accounts of a company 526 00:26:23.165 --> 00:26:24.535 when you control the company, 527 00:26:25.155 --> 00:26:27.535 but you don't hone 100% of the shares. 528 00:26:27.675 --> 00:26:28.935 In this case, 70%. 529 00:26:29.905 --> 00:26:32.895 There are very significant impact on an accounting point 530 00:26:32.895 --> 00:26:36.255 of view because you have to show the manner interest. 531 00:26:36.415 --> 00:26:37.775 A non-controlling interest. 532 00:26:38.275 --> 00:26:40.255 You have to show on the balance sheet that part 533 00:26:40.255 --> 00:26:42.535 of the equity of the company, which you fully 534 00:26:42.535 --> 00:26:45.125 Integrate, does not belong to you, 535 00:26:45.355 --> 00:26:47.205 does not belong to the parent company. 536 00:26:48.095 --> 00:26:52.365 There are also some implications on the financial risk 537 00:26:52.455 --> 00:26:55.405 evaluation, the financial leverage calculation. 538 00:26:55.775 --> 00:26:59.365 Under some circumstances, it might be quite important 539 00:26:59.585 --> 00:27:02.445 for the financial analyst to be able 540 00:27:02.445 --> 00:27:05.605 to calculate the real financial leverage as opposed 541 00:27:05.605 --> 00:27:07.165 to the consolidated one. 542 00:27:07.825 --> 00:27:10.565 Now, I will propose you some concluding source 543 00:27:11.105 --> 00:27:12.125 in the last module 544 00:27:12.265 --> 00:27:15.005 of this course on consolidating the accounts.