Valuation drivers in the telecommunications industry
The fair value of licenses
The fair value of licenses may be estimated using a number of different valuation methodologies. The choice of methodology depends on the availability of information, licenses and the existence of an active market.
- Greenfield approach. This is specifically used to value telecommunications licenses. This approach values the license by calculating the value of a hypothetical start-up company that goes into business with no assets except the asset to be valued (the license). The value of the asset under consideration can be considered as equal to the value of this hypothetical start-up company.
The greenfield approach is highly subjective. In Europe, licenses have finite useful lives, so the value of the start-up company is calculated at the end of the license's useful life. This takes into account the fair value of the remaining assets, such as networks and customers, with a potential discount, and accounting for some continued use.
Given that the assumptions relating to terminal values have a significant impact on the final valuation, they should be chosen carefully, and well documented.
- Market approach. This approach estimates the fair value by referring to purchase prices paid for licenses for similar technologies. The market approach results from the recent sale of similar licenses, and how their valuation metrics relate to the license under consideration.
The market approach is rarely used because of challenges relating to the quality of the sample, the quality of tender processes, the comparability of the acquired licenses (technology, territory covered, etc.) and the fee structure for paying for the license (upfront, annual fees as a percentage of revenues or fixed).
We believe this approach should be used more often because it is a useful cross-reference.
- Cost approach. This might be applied by estimating the license value based on its historical or replacement cost.
The cost approach results are often limited, as 2G and 3G licenses become rapidly obsolete in today's fast-moving regulatory and technological environments.
Different fee structures exist, which make comparisons very difficult:
1. One-off fees
- Market set. This is the method used by regulators to estimate an upfront fee using market comparison valuation techniques
- Price floors and minimum bids. This method is used in auctions where a "floor" price is set to ensure that the starting point for bids is in line with government expectations
2. Annual or recurring fees
- Revenue-based annual fees set as a percentage of annual gross revenues
- Annual fixed fee or annually-adjusted fee (non-revenue based periodic fee)
- In some countries, additional contributions may include taxes levied by ministries other than the telecommunications ministry, or may take the form of a small percentage of gross billed revenues to fund national research programs or to support a universal service fund