Ridgeway Industrial: Building an Enterprise-Value Bridge That Survives the Joint Venture
Ridgeway Industrial trades at a market capitalization of $2.6 billion. It reports EBITDA of $420 million, depreciation of $95 million and interest expense of $60 million. Net income was $210 million, including $18 million of after-tax equity income from a 30% stake in a logistics joint venture. The balance sheet shows $900 million of gross debt, $150 million of cash, a defined-benefit pension deficit of $80 million and a non-controlling interest with a fair value of $120 million. The joint venture's carrying value is $140 million; a recent transaction implies a fair value of $260 million for Ridgeway's stake. Two analysts disagree. Analyst A computes EV/EBITDA as (2,600 + 900 − 150)/420 = 8.0x and calls the stock cheap versus a peer median of 8.6x. Analyst B adds the NCI and pension deficit and gets (2,600 + 900 − 150 + 120 + 80)/420 = 8.45x, then calls it fairly valued. Neither adjusts for the joint venture.
1. Construct the consistent EV/EBITDA multiple and explain each adjustment, including why the joint venture must be treated explicitly.
Read the worked answer
The consistency rule. Enterprise value must represent the claim on the cash flows that sit in EBITDA. Every claim on those cash flows goes in the numerator; every asset whose earnings are not in EBITDA comes out.
Numerator.
- Market capitalisation: 2,600
- Plus gross debt: 900
- Less cash: (150)
- Plus NCI at fair value: 120 - the subsidiary's EBITDA is consolidated at 100%, but market cap reflects only the parent's share, so the minority claim must be added.
- Plus pension deficit: 80 - a debt-like obligation, already recognised as a liability under IFRS, so excluding it from EV while it depresses market cap would understate the multiple.
- Less JV fair value: (260) - the $18m of equity income is below EBITDA, so none of the JV's earnings are in the denominator. Leaving the stake inside EV charges the company for earnings the multiple never sees. Use fair value, not the $140m book value, because the market is pricing the stake at 260.
EV = 2,600 + 900 − 150 + 120 + 80 − 260 = $3,290m.
Multiple = 3,290 / 420 = 7.83x.
That is below Analyst B's 8.45x and below A's 8.0x, so the stock screens cheaper than either concluded - but only if the peers are put on the same basis.
2. Evaluate each analyst's bridge and identify the errors in the 8.0x and 8.45x figures.
Read the worked answer
Analyst A (8.0x). Two offsetting omissions and one conceptual error.
- Omits the NCI, understating EV, because the subsidiary's full EBITDA is in the denominator.
- Omits the pension deficit, understating EV for a liability that is real and recognised.
- Leaves the $260m JV stake inside EV while excluding its earnings from EBITDA, overstating EV on that count.
- The net effect is that A's 8.0x is wrong in both directions, so its conclusion ('cheap versus 8.6x') rests on a number with no consistent definition. Interest expense is correctly ignored - it is below EBITDA and irrelevant to this multiple.
Analyst B (8.45x). Correct on NCI and pension, still wrong on the JV. B's multiple charges Ridgeway for a $260m asset whose income is excluded from the denominator, so B overstates the multiple by roughly 0.6x and wrongly concludes fair value.
What neither did. Neither checked whether the peer median of 8.6x was built on the same basis. Peer sets routinely differ in NCI treatment, pension inclusion, JV consolidation and lease capitalisation. A multiple is only comparable to a peer set constructed identically; the analyst should either rebuild the peers (preferred) or state the basis and apply it consistently. On the consistent basis, Ridgeway at 7.83x is roughly 9% below the peer median, which is a modest discount that must be justified by growth, margin or capital intensity before it is called mispricing.
3. Ridgeway also trades on a P/E of 12.4x. Adjust the P/E for the joint venture, and explain why the pension and NCI adjustments that matter for EV/EBITDA do not belong in the P/E.
Read the worked answer
P/E as reported. 2,600 / 210 = 12.4x.
Removing the JV from both sides. The $18m of equity income is in net income but is not generated by the industrial business. Strip it out and capitalise the industrial earnings only:
- Adjusted earnings = 210 − 18 = $192m.
- Adjusted market capitalisation = 2,600 − 260 (JV at fair value) = $2,340m.
- Adjusted P/E = 2,340 / 192 = 12.2x.
Note the direction: the JV trades at roughly 14.4x on its fair value ($260m / $18m), above the industrial business's 12.2x, so the blended 12.4x understates the cheapness of the core business. Failing to strip the JV out would have produced the right-looking but wrong 13.5x (2,600 / 192).
Why NCI and pension do not adjust the P/E.
- NCI affects the split of consolidated earnings between parent and minority; consolidated net income already deducts the minority's share, so the numerator (market cap) and denominator (earnings attributable to the parent) are already consistent. Double-counting it would distort the multiple.
- The pension deficit is a liability already reflected in the market capitalisation through the share price. Unlike EV, market capitalisation is an equity claim, not an operating-asset claim, so no bridge is needed.
Use of the two multiples together. EV/EBITDA neutralises capital structure and tax; P/E captures the effect of leverage and interest. Divergence between the two signals that capital structure, tax or the JV is doing the work, and the analyst should reconcile them before forming a view.