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Appendix B: Possible benchmarking approaches

Benchmarking needs to be flexible in the approach taken given the circumstances of the benchmarks being assessed. It also needs to be transparent, clearly identifying all steps in a calculation and all assumptions. The following discussion is not intended to be exclusive, but is presented to provide some guidance on potential approaches to transferring international benchmarks to the New Zealand context.

Auction and tender prices for 2G – and potentially 3G – spectrum could be used to set benchmarks for the renewal prices.

Specific issues that would need to be addressed in such a methodology include:

  • The extent to which the auction or tender reveals the actual value of the spectrum to the winning bidder (i.e. the bidder’s maximum valuation), as a result of:
    • the type of auction or tender; and
    • the amount and intensity of competition for the spectrum.
  • The number of operators in the market at the time the price was set and whether the award introduced a new entrant to the market;
  • In either the case of an incumbent or a new entrant, the extent to which the marginal value revealed in the auction reflects the value to the operator or other operators of the rest of its/their existing spectrum holdings;
  • The likely expectations of the bidders at the time of award, particularly in relation to eventual market size and penetration (this having changed dramatically over the last 15 years);
  • The applicability of overseas benchmarks to the New Zealand case; and specifically the ability to adjust for:
    • Population size;
    • Population density;
    • Geography;
    • Relative levels of wealth and exchange rates; and – Market-specific trends or factors

A potential approach would be as follows:

Step
Action
Information requirements
Key assumptions
Gather 2G auction prices
  • Research overseas auctions
  • Bid prices
  • Type of auction or tender
  • Auction details (number of bidders, intensity of competition)
 
Adjust to per MHz price
  • Divide package price by No. of MHz
  • Details of spectrum package
 
Adjust for population
  • Divide by country population to obtain price per MHz/capita
  • OR: phone using population (e.g. over 7s, under 80s)
  • Relevant population
  • Assuming same long term mobile penetration rate
…for population density
  • Multiply by (NZ population density)/(Other country population Density)
  • Relevant population density
  • No assumptions made for geography (e.g. ruggedness of terrain)
  • Assumes linear relationship between population density and spectrum value
…for the intensity of competition and regulation in the market      
Convert to NZ$    
  • Need to use appropriate exchange rate (PPP rather than direct? Average over what period?)
Identification of a trend/range in pricing over time
  • Best fit line
 
  • Comparability of each of the benchmark points, to each other and to NZ.
  • Assumes all cellular markets are fundamentally very similar, in that simple adjustments as above can bring them onto a comparable basis.
Multiply back up to NZ market size      
Apply to spectrum holdings
  • Equal allocation per MHz?
  • Weighting to some, not all?
 
  • Issue of utilised and un-utilised spectrum
Identification of a trend in pricing
  • Best fit line?
 
  • Comparability of each of the benchmark points, to each other and NZ.
  • Assumes all cellular markets are fundamentally very similar, in that simple adjustments as above can bring them onto a comparable basis.

Secondary Market Transactions

There has been a steady volume of merger and acquisition activity around the world in the field of mobile telecommunications. Many of these transactions have required shareholder approval or stock market disclosures that provide significant amounts of information on the purchaser and the target, from which the value of the spectrum licence in question might be extracted.

These valuations might then be used in a trenda analysis (as above) to dertimine a price for spectrum.

Issues to consider in such an approach include:

  • The ability to accurately extract from the avaliable financial data, the value of the spectrum, but taking particular account of:
    • The attribution of value across each licence and between 2G and 3G spectrum;
    • The number of markets in which the target company was opening at the time of acquisition
  • similar issues as noted above regarding the applicability of the values to the New Zealand market;
Step Action Information Requirements Key Assumptions
Identify secondary market transactions
  • Gather relevant data, from company announcements and stock exchange filings
  • Prices, number of suscribers, relevant markets
  • Ideally use examples operating in single national market only
 

Value adjustment for
stake (controlling? minority?)
  • Make adjustment
  • Typical value premia/discounts applicable in relmarket
  • Probably need to make assumptions based on industry/country precedents
Estimate proportion of price paid applicable to spectrum licences
  • From book values of licences? (although many only use acquisition cost depreciated over licence life)
  • Premium returns aWACC
  • All announcements and filings: especially financial data
 
Calculate price per subscriber    
  • Assumption that price per subscriber accounts for underlying differences in market size
  • OR: make similar adjustments as above (could do this without using price per subscriber)
  • Assuming away differences in 2G and 3G: all spectrum likely used by more advanced technologies in future, and all equally valuable (i.e. even if “2G” service is less valuable, subscriber wouldn’t purchase expensive “3G”services without 2G bundle
Adjust as above for market sizes, competition and regulation and exchange rates      
Identify applicable trend/range      
Multiply back up to NZ market size      
Apply to spectrum holdings
  • Equal allocation per MHz?
  • Weighting to some, not all?
 
  • Issue of utilised and unutilised spectrum
Identification of a trend in pricing
  • Best fit line?
 
  • Comparability of each of the benchmark points, to each other and to NZ.
  • Assumes all cellular markets are fundamentally very similar, in that simpleadjustments as abovecan bring them ontocomparable basis.
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Last updated 3 April 2008