casemark/modeling-sum-of-parts-valuations

Modeling Sum Of Parts Valuations

When To Use

• Valuing conglomerates or diversified companies operating across distinct business segments (e.g., GE, Berkshire Hathaway, Siemens)
• Quantifying conglomerate discount or premium versus pure-play peers
• Modeling spin-off, divestiture, or breakup scenarios to estimate unlock value
• Stress-testing whether a company trades at a discount to intrinsic segment-level value
• Supporting activist investor theses or strategic review recommendations

Inputs To Gather

• Segment financials: Revenue, EBITDA, EBIT, and capital expenditures per reportable segment from 10-K/annual report segment disclosures (typically 3-5 years of history)
• Corporate/unallocated costs: Central overhead, shared services, and elimination entries not assigned to segments
• Segment-specific comps: Pure-play comparable company sets for each segment with current trading multiples (EV/EBITDA, EV/Revenue, P/E as appropriate)
• Precedent transactions: Relevant M&A multiples for segments where transaction data is more informative than trading comps
• DCF inputs (if applicable): Segment-level WACC components, long-term growth rates, and terminal value assumptions
• Net debt and adjustments: Total consolidated net debt, pension liabilities, minority interests, equity method investments, NOLs, and other non-operating assets/liabilities
• Conglomerate discount benchmarks: Historical discount ranges for the specific industry mix [VERIFY: discount ranges vary by market cycle and region]

Workflow

1. Map reportable segments — Identify each operating segment from SEC filings or annual reports. Reconcile segment totals to consolidated financials. Flag any "Other/Corporate" residual bucket and determine whether it contains operating businesses or only overhead.

2. Select valuation methodology per segment — Assign the most appropriate method to each segment:

   • EV/EBITDA comps: Default for mature, cash-generative segments with clear pure-play peers
   • EV/Revenue comps: Use for high-growth or pre-profit segments (SaaS, biotech pipelines)
   • DCF: Use when segment has unique growth profile with no close comps, or for regulated utilities/infrastructure
   • NAV/book value: Use for financial services segments, real estate portfolios, or investment holding segments
   • Precedent transactions: Layer in when recent M&A provides more relevant pricing than trading comps

3. Build pure-play comp sets — For each segment, identify 4-8 publicly traded comparables. Screen for business model alignment, geographic mix, margin profile, and growth stage. Calculate median and mean multiples; document outlier exclusions.

4. Calculate segment enterprise values — Apply selected multiples to forward segment metrics (NTM EBITDA, revenue, etc.). Produce low/mid/high range using 25th percentile, median, and 75th percentile of comp set. For DCF segments, build a 5-year explicit forecast with terminal value.

5. Allocate corporate costs — Decide treatment of unallocated corporate overhead:

   • Capitalize as negative value: Apply a corporate overhead multiple (typically 6-8x) to annual unallocated costs
   • Allocate pro-rata to segments: Distribute to segments by revenue or headcount share before applying multiples
   • Document which approach is used and why — this choice materially impacts the result

6. Bridge to equity value — Sum segment enterprise values, subtract net debt, adjust for minority interests (at fair value, not book), add equity method investments and other non-operating assets (excess cash, NOL value, real estate). Divide by diluted share count for per-share implied value.

7. Calculate conglomerate discount/premium — Compare implied SOTP equity value to current market capitalization. Express as percentage discount or premium. Benchmark against historical trading range and sector-typical conglomerate discounts [VERIFY: typical conglomerate discounts range 10-25% but vary significantly by region and sector].

8. Run sensitivity analysis — Build a matrix showing implied equity value across:

   • Multiple ranges (±1-2 turns of EBITDA) per segment
   • Varying corporate cost treatment
   • Different terminal growth or WACC assumptions for DCF segments
   • Scenario toggle for full breakup vs. partial divestiture

Output

• SOTP summary table: Segment name | Metric used | Metric value | Multiple range (low/mid/high) | Implied EV range per segment
• Corporate adjustments bridge: Unallocated costs, net debt, minority interests, non-operating assets, share count
• Implied equity value: Per-share range (low/mid/high) with current price reference and implied upside/downside
• Conglomerate discount analysis: Current implied discount vs. historical range
• Comp set detail: Per-segment comparable companies with key financial metrics and selected multiples
• Sensitivity tables: 2-way matrices for key segment multiple and cost assumption toggles
• Methodology notes: Rationale for methodology selection per segment, key assumptions, and data sources

Quality Checks

• Segment EV values sum correctly and reconcile with adjustments to total implied equity value
• Each segment's applied multiple falls within the documented comp set range — no cherry-picked outliers
• Corporate unallocated costs are fully accounted for (not inadvertently dropped)
• Net debt figure matches most recent balance sheet and includes off-balance-sheet items (operating leases if pre-IFRS 16, pension deficits)
• Diluted share count includes in-the-money options and convertibles using treasury stock method
• Implied per-share value range is internally consistent across low/mid/high (no crossed ranges)
• Conglomerate discount calculation uses consistent EV-to-equity bridge
• All externally sourced multiples and financial data include as-of dates
• Mark any segment with fewer than 3 pure-play comps with [VERIFY] for reliability
• Cross-check SOTP implied value against consolidated DCF or comparable company analysis for reasonableness