Appendix A: Summary evaluation

Formula approach

Develop forecast for revenue, standard operating costs and capex profile. Discount to NPV in excess of WACC and taking account of other intangibles

Assume organic development, no major technological change

Issue of apportionment across rights

• High level proxy for cash flow (e.g. ARPUs, % of disposable income)
• Cash flow margin
• WACC
• Value of Capital/Assets in business
• Capex forecast
• Value of Other Intangibles

Robustness rating dependent on level of assumption required for cash forecast variable, intangibles value, capital expenditure timing, attribution of spectrum

Full Business Valuation

Develop detailed cash flow forecasts, based on assumptions as to business strategy. Discount future cash flows to value the business (NPV). Apportion value to spectrum and other tangible and intangible assets.

Detailed forecast of revenues, costs and capital expenditure. As above, in more detail

Practicality rating given assuming cooperation of operators.

Likely to be highly subjective over length of time: compared to simple approach, many complex assumptions rather than fewer simple assumptions.

Robustness depends on depth of analysis.

Use overseas benchmarks:

• To identify a trend in prices that could be applied to current renewal process.
• As a starting point in Covec style formula
• As inputs to a simulated auction

Auction prices

Auction circumstances

Conversion information

• No. of operators in market
• Population
• Population density
• Technology used
• Regulatory environment
• Wealth
• Exchange rates

• Validity of auction prices: to what extent do they represent/approximate “Fair Market Value”
• Conversion of offshore data to NZ context
• Conversion of auction parameters to NZ context
• Availability of data and how recent is it?

Gather information from merger and acquisition announcements, from which the value of the spectrum licence in question might be extracted.

Use these valuations in a trend analysis to determine a price for spectrum.

As above (auctions), plus

• Financials
• Stock exchange/company announcements
• WACC

• Conversion of data
• Availability of robust information
• Relevance of transactions to NZ context

Scale original auction prices using a factor that takes into account past and expected future trends in revenues and costs

Original auction prices

Inputs to z-factor estimate:

• Historical revenue trend
• Historical cost trend

• Relevance of original auction prices
• Basis for formula trend (i.e. z factor)

Estimate value of company, apportion value to mobile business in NZ, apportion value to spectrum.

Market capitalisation (Telecom in NZ, Vodafone global)

Segmented financial statements

Value of assets and intangibles.

• Telecom: difficulty in separating value into its component parts
• Vodafone: attributing value to NZ operations

Value of 2G spectrum determined by the cost to the operator of migrating the entire business to 3G spectrum. This methodology divorces value from income.

Cost of network build (if any)

Transfer/conversion costs

Time required to migrate

Characteristics of 3G network

Impact on future service offerings

• Doesn’t reflect the income potential
• In context of operators owning 3G spectrum, should represent the maximum value operator will pay – why pay more for a licence?

SmithNERA approach: price spectrum at marginal value for additional channel(s) i.e. the cost of network build to a given service standard with and without the additional spectrum

• Core and peak network configuration/loading assumptions
• Average infrastructure costs (sites, equipment, related opex and maintenance)

• Doesn’t reflect the income potential of the spectrum