By: Alfonso Porras and Tom Coffey on behalf of CostQuest Associates
Telecom network valuations are intricate due to the complex factors related to owning, updating, and operating network infrastructure. Infrastructure can be publicly or privately owned, rely on different technologies, and operate in vastly different geographical and demographic regions. As telecommunications technology continues to progress, infrastructure ages, is updated over time, and expanded, the value of a network evolves. The changes create unique challenges for a company as the value of their underlying infrastructure can affect business and financial decisions. Changes in value affect the ability to raise capital, take certain tax positions, or decide when it makes sense to enter M&A activity.
An up-to-date network valuation can be critical to effectively support strategic financial decisions, tax compliance requirements, and more.
This article delves into the complex reality of telecom network valuations. We aim to underscore the significance of having an up-to-date network valuation and shed light on the various types of telecom network valuations that cater to specific needs and use cases.
The Critical Role of Telecom Network Valuations
Telecom networks generate cash flows and accrue value based on the tangible assets in their network. A modern, valuable network that can provide high-speed internet access to everyone in its footprint will gain and retain customers. It will discourage competition from even the largest players. An outdated network with inferior assets will continue to lose customers and invite competition from other firms looking to provide a better product, even if it is currently producing cash flows.
A professional valuation reflects the ability of the underlying assets to produce cash flow, considering:
- The context of evolving technology and increasing demand for data,
- The geography and customer profile that the entity operates,
- The business, competitive, and regulatory environment
The ‘book value’ simply reflects what was spent, with potentially an approximation for depreciation. It does not consider the above factors.
Having an up-to-date view of the value of your network assets helps guide effective strategic financial decisions, improve financial reporting, and can help with tax positions to ensure better results in meeting compliance.
- For strategic purposes: it’s about capturing the true economic value of network assets to confidently inform mergers and/or acquisitions, corporate financial decisions, and help raise capital through external and internal funding.
- For financial reporting: you want to ensure you report the actual value of the network assets you hold in your books, loan agreements, portfolio agreements, etc. It also smooths the compliance and audit process.
- For property tax: it’s about paying the fair and correct amount of taxes. Property tax values are directly tied to the actual value of your assets and correspond directly to a cash expense. Conducting a network valuation for property taxes can provide significant tax savings, by ensuring that you are paying a fair value on the network property you own. Network valuation can also provide you with the ability to support tax positions in both income tax and the sales and use tax space, depending on your overall tax strategies.
Determining the value of your assets isn’t straightforward. Are you valuing the entire business? Is the value just the tangible assets like equipment and fiber – or should the value include the customer relationship and other intangible assets? How should software and regulations factor in? This complexity makes it crucial to understand both the purpose of your valuation and having a team that has experience in the area you need.
Now, let’s dive deeper into the types and use cases for telecom valuations.
The Different Types & Use of Telecom Network Valuations
1. Valuation for Property Tax and other taxes
All 50 states place a property tax on real estate, and 38 tax the tangible personal property of businesses. Telcom networks are capital intensive, and the tangible real and personal property investment make up a significant portion of their total value. Property tax compliance is based on your book value and this capital investment drives higher property taxes if the book value overstates the value of your network assets. Typically, assessors calculate property tax values simply by taking a book value less than a simple depreciation rate, which rarely takes into consideration and may not capture the technological obsolescence or other factors that impact value.
Fair Network Value Equals Fair Tax Liability
In most jurisdictions, state and local statutes are designed to tax only the fair market value of certain tangible assets. Taxes paid are typically a percent of the total value of the network at a moment in time. Unlike a sales tax, there is no transaction to determine fair market value, so it must be calculated or considered separately. There are situations where assessor assigned values may reflect fair market value and situations where they may not. An accurate valuation appraisal of your assets helps confirm that the taxes owed align with a fair tax liability.
Think of it like this:
- Fair Market Value of Assets = Accurate Tax Liability
- Over-valuation of Assets = Higher Tax Liability
Tax rules vary by asset type, jurisdiction, industry, and the specific tax strategies employed by management. These will all affect value: fair market value should only reflect the scope of what is taxable and should be presented in a way that is compatible with the tax rules and practices in play. Here are a few examples of common considerations.
Non-Taxable Components
Modern telecommunications networks contain intangible elements, such as software and intellectual property, which may not be subject to taxation. For an accurate valuation, it is essential to accurately identify and quantify any non-taxable components or exclusions. By doing so, companies can minimize their tax liabilities and ensure compliance.
Common Examples: Software exclusions may be permitted for certain routers and networking equipment. Capitalized labor connecting a drop at a customer’s house may not be taxable.
Tax Jurisdictions
Specific rules in a state or county may dictate how an appraisal is prepared, the type of information to be used, the type of analyses considered, and other factors. Sometimes, these are specific statutes and or case law. Often, these are not formally documented, but are common practices from assessor offices. When looking to a certified appraiser to produce an appraisal, the appraiser should be familiar with the jurisdiction the appraisal will be used:
- What methods are acceptable?
- What inputs are appropriate?
- What items are excluded?
These factors will determine what can be considered in your network valuation under the appropriate jurisdiction and will influence the results of the full network valuation assessment.
Here are some examples of State Tax Guidelines:
- Florida Real Property Appraisal Guidelines
- Handbook of Texas Property Tax Rules
- California Property Tax – An Overview
2. Telecom Network Valuations for Mergers & Acquisitions
Investors may have different priorities when considering the valuation of a telecom asset. Their main objective is typically to generate a return on their investment. This involves understanding the entire business, potential for expansion, competitive threats, and customer profiles. The value context for an investor may not reflect a fair market value standard.
Users of an M&A valuation may also want to consider various outcomes or sensitivities, such as a base case and worst-case scenario. Users of M&A valuations may be more sophisticated and less concerned with compliance rules. For example, cost or maintenance synergies that are specific to the individual buyer of the network would be incorporated into the valuation. The analysis may also be done considering the debt financing situation of the buyer.
Inform Economic Potential
M&A transactions often hinge on the promise of future growth. Companies must affirm the economic potential of network assets, including their capacity to attract new customers. This assessment goes beyond the tangible assets and delves into intangible aspects, such as the brand’s reputation and customer loyalty. Evaluating these elements requires a thorough analysis of key competitive factors, such as the number of incumbents in the market and the technologies they employ.
Support Financial Growth
Telecom network valuations are not mere financial formalities; they are dynamic tools that can underpin financial growth strategies. Companies embarking on M&A activities need to ensure that their investments are poised to generate a favorable return. A comprehensive network valuation provides a crucial reference point for assessing the acquisition’s return on investment (ROI) potential. By aligning financial growth objectives with network valuations, companies can make informed decisions that bolster their market position and profitability.
Having a network valuation at hand profoundly influences the M&A decision-making process. It equips companies with the data needed to determine the fair market value of network assets, preventing overpayment while maximizing potential gains. Metrics like revenue per user, negotiation tactics, and scenario analysis become pivotal tools for negotiation and strategic planning. Moreover, an impartial third-party perspective can clarify the valuation process, facilitating more objective and informed decisions.
3. Telecom Network Valuations for Financial Reporting
Telecom network valuations are integral to the accuracy of financial reporting. Beyond being procedural requirements, these valuations significantly impact a company’s financial stability and transparency, particularly post-acquisition. Using an experienced appraiser for financial reporting valuations will reduce audit fees, limit management time, and help manage the risk of misstatement. Their influence extends across notable areas:
Accounting Impairment: Network valuations are central to assessing asset carrying values, guarding against misrepresentations in financial statements.
Investor Confidence: Transparent and precise financial reporting, underpinned by valuations, enhances investor trust and perception.
For entities carrying goodwill on their books, periodic assessments for impairment are routine, and network valuations are key in this process. They help establish whether the carrying value of assets aligns with their recoverable amount, contributing to the company’s financial transparency and compliance. Valuations serve as a tool for adherence to fair value regulations for long-term financial sustainability, and the assurance of adequate asset valuations.
4. Telecom Network Valuations for External funding
The industry’s quest for broadband infrastructure expansion and fostering innovation rests on the strategic acquisition of external funding. Whether you’re eyeing loans or investments, aligning your network valuations with lender or investor requirements is crucial. One key metric, the loan-to-value ratio (LTV), often plays a central role in these arrangements. To maximize external funding opportunities, it’s essential to certify that your network’s assessed value meets or surpasses the necessary LTV thresholds.
A precise network valuation quantifies your assets and showcases your financial responsibility and creditworthiness, increasing your chances of securing the resources needed to drive your telecom endeavors forward. In a competitive industry, this strategic move can be the catalyst for your success in your quest for external funding.
Closing thoughts
A current valuation of telecommunications network assets is a map when guiding decisions and reporting in multiple business facets. As we’ve explored, comprehending the genuine value of your network extends beyond conventional financial analysis. Telecom network valuations significantly impact tax and compliance requirements, M&A decision-making, financial transparency, and external funding opportunities, all of which are prominent factors in telecom companies’ performance and sustainability.