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Valuation drivers in the telecommunications industry - Contractual rights and obligations - EY - Global

Valuation drivers in the telecommunications industry

Contractual rights and obligations

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IAS 38 defines contracts as intangible assets that have a fixed or definite term agreed by both parties. They provide for contractual rights to receive money or contractual obligations to pay money on fixed or determinable dates. Contracts represent the value of rights that arise from contractual arrangements.

This methodology is useful for assessing such agreements as MVNO network sharing, content and applications or roaming agreements.

The main analysis that should be performed concerns the favorable or unfavorable terms of the contract relative to the market: does this contract provide the operator with a competitive (dis)advantage?

Other characteristics of the contract to be considered include:

  • Renewal clauses
  • Historical trends
  • Exclusivity or similar characteristics

Favorable vs unfavorable terms of the contract

Contracts that might have a favorable or unfavorable nature include:

  • Lease/rental agreements
  • Supply contracts
  • Distribution agreements
  • Indefeasible rights of use (IRU)

Long-term lease/rental agreements signed in the past at market rates (fixed, non-adjusted rent) might eventually become favorable or unfavorable agreements because of the cyclical nature of the market. The "non-market" part of rents borne or avoided by the acquirer due to the existing rental/lease contract should be valued and booked in the acquirer's consolidated accounts.

Supply contracts and distribution agreements shall be checked for any off-market terms and conditions as well as for any exclusivity clauses, as these might give rise to an intangible asset being identified, recognized and valued.

IRUs enable operators to use the networks of other telecommunications carriers for an amount that can be compared to a rent. All IRUs are signed for long-term periods and represent a competitive advantage over other market participants, as capacity is limited in the market and, once contracted, they are not available to other market participants. Therefore, these contracts may represent a great deal of value to their owners, and are often included in the PPA.

Non-compete agreements are contracts between a buyer and a seller of a business, restricting the seller from competing in the same industry for a specific period of time, often within a defined geographic area. The principal technique used to value non-compete agreements is an incremental approach, which values the asset based on the difference in cash flows between scenarios with or without the non-compete agreement in place ("with or without approach"). The main limitation of this approach is that it is highly subjective, and the inputs are discretionary in each case.

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