There are two ways to value any asset including spectrum licences. These are:
1. An analysis of the cash flows derived from the asset using the DCF method.
2. Benchmarks from financial transactions for similar assets e.g. spectrum auctions and M&A.
In our opinion spectrum auctions provide a useful financial benchmark to value similar spectrum licences (i.e. similar geographies and similar spectrum bands) via a £/MHz/Pop metric. We expect a rational value is placed on spectrum during the auction process by an acquirer via a DCF analysis to value the future cash flows that can be expected from this asset. However, we assert that a DCF model built for the cash flows stemming from the spectrum asset in question provides the most accurate way to value the licence provided that defensible assumptions are used for the addressable market, revenues and cost of equipment.
Our spectrum valuation methodology involves a DCF valuation which is then sense checked versus comparable spectrum auctions (i.e. similar geographies and similar spectrum bands).
Certain key questions arise during the valuation process. This includes:
- What discount factor should be used and should this be derived from the CAPM (Capital Asset Pricing Model) or adjusted CAPM?
- How to build up from CAPM ( Ke = Rf + (β x Rp) )? Should a Company specific risk premium be added?
- How do I present a spectrum licence on my balance sheet?
- Should I include or exclude the Terminal Value in the DCF?