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Valuation drivers in the telecommunications industry - Purchase price allocation PPA methodologies - EY - Global

Valuation drivers in the telecommunications industry

Purchase price allocation (PPA) methodologies

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All the acquired assets and assumed liabilities should be recorded at fair value, and their sum compared with the price paid by the acquirer.

Telcos acquiring assets need to clearly communicate to the market the value of the assets acquired and the liabilities assumed in an acquisition. To do so, they need robust valuation techniques and methodologies.

Evaluating assets vs. liabilities

It is vitally important for acquirers to communicate clearly to the market about the value of assets acquired and liabilities assumed as part of an acquisition.

Therefore, the telecom-specific assets of the target should be identified and valued using robust valuation techniques and methodologies. Estimated asset values are reported as part of a PPA analysis, performed in accordance with IFRS requirements.

Furthermore, IFRS 3 (Revised) has introduced new challenges in terms of purchase accounting. The most critical issues for valuation include:

  • Valuation of non-controlling interests
  • Option to recognize goodwill on non-controlling interests
  • Contingent consideration measured at fair value

PPA benchmarking

Our benchmark analysis of PPA results reported by telcos has shown that most companies provide detailed qualitative and quantitative information about intangible assets, their remaining useful lives and the residual goodwill components.

This analysis was based on annual reports of telecommunications companies in 21 countries, disclosing PPA results of 54 telecommunication transactions that were reported by public companies. The results of this analysis were summarized in two reports , Global surveys of purchase price allocation practices published by EY in 2008 and 2009.

According to the last study, published in 2009, recognized intangible assets represented — on average — approximately 30% of the telecommunications industry¹ targets' EV, while goodwill accounted for about 60% .

Intangible assets recognized in PPA in the telecommunications industry (as % of EV); source Global surveys of purchase price allocation practices, EY 2009, available via

Intangible assets

Among the intangible assets recognized in telecom acquisitions, the most significant value was typically assigned to:

  • Customer relationships and contracts
  • Licenses for mobile operators or technology-related assets for technology and equipment companies
  • Trade names

Other intangible assets include agreements, such as distribution, supplier or interconnect arrangements.

Life licenses remaining useful

Most intangible assets identified in the telecommunications industry would typically have a definite useful life (including in some cases the trade names or trademarks).

Customer relationships are amortized, on average, over a five- to eight-year useful life, while the useful life of licenses is often based on their legal term plus foreseeable extensions in some cases.

Goodwill components

Our analysis confirmed that telcos disclose information concerning the components of goodwill in accordance with requirements of IFRS 3/3R and FAS 141/141R. The existence of goodwill is generally explained by synergies, additional market share and future services to be offered to the market by the combined business.

Some intangible assets might also be included in the amount recognized as goodwill if their value is not material (such as distribution networks). In addition, the following components may also be included in the goodwill calculations:

  • Customer service capabilities
  • Presence in geographic markets or locations (market power/influence)
  • Strength of labor relations
  • Ongoing training or recruiting programs
  • Outstanding credit ratings
  • Access to capital markets
  • State of relationships with governments or regulators

These disclosures are key for investors, and provide insights about the strategic and financial rationale of the transaction.

Asset valuation methodologies

Recording assets and liabilities at fair value

All the acquired assets and assumed liabilities should be recorded at fair value, and their sum compared with the price paid by the acquirer.

According to IFRS 3/3R (Business Combinations) and FAS 141/141R (Business Combinations), the fair value is defined as "the amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm's length transaction."

In addition, standards specify that fair value should reflect market expectations about the probability that the future economic benefits associated with the asset will flow to the acquirer.

Therefore, any analysis should reflect assumptions which would be common to any market participant if it were to buy or sell each asset on an individual basis. Thus, the fair value should be determined with reference to market participants in general, but exclude synergistic values that are unique to a particular buyer.

Methodologies to value intangible assets

The following methodologies are commonly used to value intangible assets:

  • Income approach. This allows future economic benefits of the asset to be captured (via the multi-period excess earnings method, relief from royalty method, build-out or greenfield method).
  • Market approach. This approach compares the asset with similar assets, and prices paid for them (comparable transactions method).
  • Cost approach. This relies on the principle that no prudent investor would pay for an asset more than the cost to recreate it or to reproduce an asset of similar utility (replacement or reproduction cost method).

More than one approach may need to be considered to arrive at a supportable valuation range.

  1. Valuing trademarks/trade names
  2. Estimating the fair value of subscriber relationships
  3. The fair value of licenses
  4. Contractual rights and obligations
  5. Tangible assets
  6. Goodwill

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