Ray, I could write a book (sigh)
You mention Net Present Value, but I'm hoping that you might put some flesh on these bones. In other words, I find your post to be a bit cryptic.
What the Europeans did was little different than a little company called NextWave. Perhaps, your interest in wireless predates C-Block, but I'm sure Bernard remembers. My disdain of the aforementioned entity knows few bounds.
However, note that I said little different, not no different.
How does one quantitatively value an intangible asset such as a spectrum license?
There are three primary methods of appraisal; the cost, market and income approaches. An undeveloped spectrum license will be valued primarily using the income approach. The principle technique of the income approach is discounted cash flow ("dcf") analysis.
DCF is what the wall street analysts use primarily to value pre-earnings companies. DCF is a rigorous analytical exercise, which when properly done, will result in a reasonable estimation of value. Subsequent sensitivity and scenario analysis permits one to QUANTIFY risk. (Disclaimer: I would not characterize most Wall Street sell -side analysts' DCF projections as rigorous).
Net Present Value of the the SP's or of the rights to the licenses or to the profit stream from the SPs or EBITDA or what in particular?
What I'm referring to is the Net Present Value of the Business opportunity. What one is trying to get to is free cash flow on a year over year basis. Free Cash Flow ("fcf") is basically defined as:
Net income PLUS non-cash charges added back (i.e., depreciation and amortization) LESS capital equipment, principal repayments and any other cash outflows required for the period in question.
The analysis must include a reasonably accurate projection of year-over year capital equipment expenditures, and debt service costs or the analysis is junk.
However, it doesn't end there. At the end of the projection period, one still has a large store of value that hasn't been captured above, i.e., the going concern value of the business that has been created. One can value that business on capitalization ratios, P/E ratios, multiples of EBITDA, or whatever strikes your fancy but assuming the business is generating revenue and is at least EBITDA positive a significant store of value has been created. Depending on what technique has been used one may subtract outstanding debt and add back current liquid assets (cash, marketable securities and accts receivable). The resulting value is discounted back to the present using an appropriate discount rate (which may vary from the rate used to discount year over year FCF depending on the expectation and assumptions at the end of the forecast period.
Basically, that's how you get to a bid price.
Now there a whole lot of room to make mistakes here - no one but no one has a crystal ball - but as mentioned above one can mitigate the potential for drastic error by rigorous testing of the input assumptions and sensitivity and scenario analysis.
There is no room here for believing your own "spin" or typical corporate testosterone-laden chest thumping. And of course that's exactly what happens.
If I were to look at the Net Present Value of the license holders, in view of the Forrester Research projection that the industry falls into the red by 2006 and does not return to profitabilily until 2013, then I'd say the NPV of VOD, BT, DT, FT, Orange and others if far less than the current offer prices in the stock market.
The foregoing presumes that Forrester's analysis is correct. If we accept such I would not necessarily argue with you however is the Forrester projection correct? See caveat above about crystal balls.
I have not been privy to the information of the term of the bonds that DT, FT, BT, Orange and others have floated in order to pay for the UMTS licenses, so it is very hard to judge the Going Concern Value. Should the bonds run concurrently with the licenses, one can presume that at the end of the term, i.e. 2020, that technology will have moved on to 5G and that the 3G networks will be about on a par with present day AMPS systems.
As an initial point, don't confuse debt service with going concern value. How do you think Craig McCaw got to be a multi-billionaire.
On par with present day AMPS systems? That's bad? You say that in what I think its safe to say a pejorative manner, but would you take one today? I would - in a nanosecond. Take any rural cellular system, many which are still AMPS having not even gotten to 2G, yet they are valued in many cases at hundreds of dollars a pop.
DON'T focus on technology, or replacement cost - DO focus on cash flow.
(Rhetorical question: why are the RBOCS winning?)
(Aside: Yes, 3G is a technology looking for a business case but that case will be found. If it's not , then license winners with existing customers and spectrum holdings will use the new spectrum to augment their current network and delay capx.. Note also that after twenty years the Industry is FINALLY starting to get smart and talk seriously about shared infrastructure costs.)
Which is to say, I believe that the 3G spectrum license is a wasting asset, one that will no doubt have to be renewed at a greater expense in another auction round in 2018, and which will no doubt keep the residual value of the current UMTS license at a minimun.
Yes, those licenses will have to be renewed. Yes the holders will probably have to pay more in absolute currency BUT most likely not in discounted currency. Since the parties who will be bidding against the incumbent will have to build their network greenfield while the incumbents will have already amortized a large part of those costs and will be able to incrementally upgrade. Advantage incumbent, especially in an auction environment. (See RBOCs again)
Furthermore, I expect spectrum allocations in other parts of the RF spectrum to take away the specific bleeding edge lead that UMTS enjoys in the current scheme of things.
Agreed - now quantify that diminution
Gosh this is long, told you I could write a book. Basically, a good dcf will capture those risk factors you describe; high technology cost, obsolescence, cannibalization, etc, but also capture the value of incumbency, competitive advantage and barriers to entry. I'm already said that I think the Euro auction winners spent money wildly, but I haven't run my own analysis so I can't say if it was reckless.
I have yet to see in my lifetime a circumstance where the value of spectrum declined. Surely people have lost money, but it was only because they paid too much in the NEAR TERM, and hence lacked staying power.
Look at NextWave, if they hadn't defaulted, if they could have made the interim payments to the Commission, they could have walked away recently with a multi-billion dollar profit - notwithstanding the fact that their bids were insane at the time.
I hate those guys.
best regards,
ww |
