The relative value of a pure-play PCS operator compared to an incumbent mobile carrier in Canada

Transcription

1 SCHEDULE D The relative value of a pure-play PCS operator compared to an incumbent mobile carrier in Canada By: Lemay-Yates Associates Inc. March 2003

2 The relative value of a pure-play PCS operator compared to an incumbent mobile carrier in Canada Report presented to Microcell Telecommunications Inc. March 2003

3 Table of Contents 1. EXECUTIVE SUMMARY INTRODUCTION COMPARATIVE BUSINESS PLAN PARAMETERS SUBSCRIBER FORECAST, MARKET SHARE AND REVENUES OPERATING COSTS NETWORK CAPITAL INVESTMENT FINANCING PARAMETERS VALUATION OF TWO BUSINESS OPPORTUNITIES INCUMBENT CELLULAR/PCS OPERATOR (ROGERS/BELL MODEL) NEW ENTRANT (MICROCELL) OBSERVATIONS AND ASSESSMENT Business plan values relative to proposed license fees Tables and figures Table 1 Subscriber forecast... 9 Table 2 Industry operational parameters Table 3 Operations expense parameters forecast Table 4 Operator fixed assets Table 5 Capital expenditure per added subscriber 1998 to Table 6 Forecast of capital expenditure per added subscriber Table 7 Existing long-term debt Table 8 Bell Canada cost of capital Table 9 Rogers/Bell Model Pro forma cash flow and valuation Table 10 Microcell Pro forma cash flow and valuation Table 11 Comparison of valuation results at same cost of capital Table 12 Comparison of valuation results higher cost of capital Table 13 - Proposed Industry Canada license fees Figure 1 LYA Canadian mobile subscriber forecast... 8 LYA Report - Comparative Spectrum Valuation March 2003 Page i

4 1. Executive Summary The purpose of this Report (prepared by Lemay-Yates Associates Inc. on behalf of Microcell Telecommunications Inc.) is to provide a quantified discussion of the relative value of a business plan from the point of view of a pure-play PCS licensee when compared to an incumbent mobile operator who also has a PCS license. Microcell is unique in the Canadian mobile market in that it operates a national network with one license. Microcell has a 1.8 GHz PCS license and operates using GSM technology. This Report provides a valuation assessment of Microcell as compared to a typical hybrid incumbent cellular/pcs provider. To compare the valuations, a set of business plan parameters was developed reflecting reasonable going forward assumptions. Two sets of parameters were considered, one for Microcell and one for a combination/average of Rogers AT&T Wireless and Bell Mobility (the Rogers/Bell model ). It should of course be kept in mind that there are many possible variations on key industry parameters going forward. The objective of this Report is not to define every possible characteristic of the future mobile industry, but to present a reasonable set for discussion purposes that is reflective of typical business planning that would be seen in the industry. Valuations presented herein should be considered as typical based on reasonable and conservative expectations. Given its larger absolute size over the period of the pro forma business plan, the Rogers/Bell model has a larger absolute value. LYA Report - Comparative Spectrum Valuation March 2003 Page 1

5 The higher valuation is largely a function of the fact that at the outset of the study, the Rogers/Bell model is starting with almost three times as many subscribers as Microcell. This illustrates the differential attributable to Rogers/Bell as a large incumbent compared to Microcell as a relatively new entrant. The incumbent franchise has a higher intrinsic value than that of the third in player. Given that Microcell is emerging from a restructuring process and is a much smaller player than either of the other two, it is likely that its weighted average cost of capital (WACC) will continue to be higher than that of the Rogers/Bell model. Therefore valuation results reflect this and are shown below. Rogers/Bell Microcell model model NPV -- total ($M) $ 1,494 $ per covered pop $ 63 $ per covered pop/mhz $ 1.24 $ per licensed pop/mhz $ 1.01 $ 0.40 IRR 16% 17% WACC 12.0% 14.2% Based on this analyses, the value of the business plan of Microcell is 60% lower on a per licensed pop per MHz basis compared to that of the modelled incumbent cellular/pcs operator. This assumes a conservative differential in the cost of financing with Microcell cost at 2% higher than the Rogers/Bell model on average. On a per pop basis (i.e. excluding the differential associated with the relative size of the licenses) Microcell s valuation is 70% lower than the Rogers/Bell model result. LYA Report - Comparative Spectrum Valuation March 2003 Page 2

6 In its fee consultation, Industry Canada has proposed a new fee regime which would be applied based on the population of the geographic area licensed. The fee would be $0.052 per 1 MHz of assigned spectrum per pop, phased in over a seven year period. In present value terms (evaluated at the same WACC as for the business plan valuations), the proposed fees equate to $0.23 per licensed pop per MHz using a WACC of 14.2% (i.e. the same WACC as used in the Microcell model). The license fee proposal thus represents by itself almost 60% of the entire value of the pro forma Microcell business plan. In the case of the Rogers/Bell model, the fee has an impact of 25% of the business plan value. The impact of these fees on the business cases of all of the modelled operators is substantial, but has a more severe impact on the new entrant (Microcell) valuation. LYA Report - Comparative Spectrum Valuation March 2003 Page 3

7 2. Introduction The purpose of this Report is to provide a quantified discussion of the relative value of business plans from the point of view of a PCS licensee compared to an incumbent mobile operator who also has a PCS license. Note This LYA Report was developed independently for Microcell Telecommunications Inc. by Lemay-Yates Associates Inc. (LYA) as part of Microcell s comments in the consultation process initiated by Industry Canada in December 2002 Consultation on a New Fee and Licensing Regime for Cellular and Incumbent Personal Communications Services (PCS) Licensees. The LYA Report is based on industry analysis and research conducted by LYA. Going forward projections and assessment of values are based on reasonable estimates and assumptions made by LYA and do not necessarily reflect the views of Microcell management. Microcell is unique in the mobile market in that it operates a national network with one license. Microcell has a 1.8 GHz PCS license and operates using GSM technology. To summarise the characteristics of the other major players: Bell Mobility ( Bell ) is the incumbent cellular licensee in Ontario and Quebec, owned by ILEC Bell Canada, in turn owned by BCE Inc. Under the same umbrella are the mobility operations of Aliant and Telebec Mobility, and via marketing agreements, those of other telcos (notably MTS and Sasktel, but also smaller ones such as Nortel Mobility and Thunder Bay). It has been developing a business in western Canada via a combination of network build and resale/roaming agreements with Telus. Bell Mobility operates analogue cellular service as well as PCS. LYA Report - Comparative Spectrum Valuation March 2003 Page 4

8 Telus Mobility ( Telus ) is the combination of the incumbent cellular licensee in Alberta and BC with the former Clearnet. Also included is the former QuebecTel Mobility (now part of Telus Quebec, which operates as the ILEC in eastern Quebec). Clearnet operated Enhanced Specialised Mobile Radio (ESMR) services across Canada and has a national PCS license. Telus has been further developing its business in eastern Canada via a combination of network build and resale/roaming agreements with Bell. Telus Mobility thus operates analogue cellular service as well as PCS and ESMR. Rogers AT&T Wireless ( Rogers ) operates the national network with the broadest coverage for any one operator. It has national cellular and PCS licenses and covers more than 93% of the Canadian population. It operates analogue service as well as PCS. It migrated its PCS network to GSM, the same technology deployed by Microcell. The three major players other than Microcell are national in scope, and operate as incumbent cellular licensees in all or part of their operating areas. By the time Microcell began operating in 1996, these three other entities were already together serving more than 3 million customers and had been in operation for some 10 years. Thus, Microcell stands alone as the only new entrant in the Canadian marketplace. This provides a significant head start advantage to the other three major players. This incumbency value was clearly reflected in the relative valuations presented in a 1997 Report developed for Industry Canada by Lemay-Yates Associates Inc. 1 For example, the valuation for an operator with both cellular and PCS licenses was projected to be 3.5 times greater than an operator with only a PCS license, when LYA Report - Comparative Spectrum Valuation March 2003 Page 5

9 operating with the same cost of capital. 2 This was based on going forward assumptions valid in 1996, but which in fact reflect operating parameters that are similar to those actually realised by the industry since (in terms of penetration, ARPU, opex, etc.). For the present Report, the following key elements underlie the methodology for comparing the entities herein: The cellular/pcs incumbent operator is developed as an average of Rogers and Bell. This provides a composite view of a large operator in Canada with broad coverage objectives and a significant base of incumbent operations. While Telus also has these characteristics, it operates three networks cellular, PCS and ESMR as well as SMR services. Telus integrates the former new entrant operations of Clearnet across Canada with ILEC operations in Alberta, BC and parts of Quebec. For simplicity, and reflecting a more pure play comparison, Microcell is juxtaposed against a model based on a composite of Rogers and Bell (the Rogers/Bell model ). Microcell and the other operators are all in service at present. To reflect an initial investment in the valuation model, the gross fixed assets for the individual operators are assumed to be acquired. Thus the valuation model assumes an outflow of capital expenditure in 2003 which is equivalent to the network investment made to date. Existing debt is incorporated into the valuation for purpose of calculating interest payments and pro forma income taxes. 1 Assessment of the Market Value of Cellular Telephony, Personal Communications Services (PCS), and Enhanced Specialized Mobile Radio (ESMR) Licenses; Cots Contract # U , January 21, Ibid, Appendix 4 Estimates were provided for an alternate forecast (wherein PCS subscribers exceeded cellular (which more closely represents the split of subscribers in the market at present). The valuation for PCS-only at 14.5% cost of capital was $29 per pop and for a Cellular and PCS licensee was $106 per pop at the same cost of capital. LYA Report - Comparative Spectrum Valuation March 2003 Page 6

10 3. Comparative business plan parameters To compare the valuations, a set of business plan parameters was developed reflecting reasonable going forward assumptions. Two sets of parameters were considered, one for Microcell and one for a combination/average of Rogers and Bell. It should of course be kept in mind that there are many possible variations on key industry parameters going forward. The objective of this Report is not to define every possible characteristic of the future mobile industry, but to present a reasonable set for discussion purposes that is reflective of typical business planning that would be seen in the industry. Valuations presented herein should be considered as typical based on reasonable expectations. Business plans consist of forecasts of subscribers, market share, revenue per customer, operations expenses and capital investments. These are discussed in the following sections. 3.1 Subscriber forecast, market share and revenues The following figure provides LYA s forecast of Canadian mobile subscribers. The penetration of population grows from an estimated 42% by year-end 2003 to 70% by LYA Report - Comparative Spectrum Valuation March 2003 Page 7

11 Figure 1 LYA Canadian mobile subscriber forecast 80% 30,000,000 % of population 70% 60% 50% 40% 30% 20% 10% 0% ,000,000 20,000,000 15,000,000 10,000,000 5,000,000 - Number of subscribers Penetration of population Total industry subs As the market is maturing, growth rates are much lower going forward than they have been in the past. Up until 2001, growth rates were typically in the range of 25% to 30% per year in terms of subscribers. This trend diminished dramatically in 2002, with the industry only experiencing a 12% growth. While going forward increases are not expected to recover to historical levels, growth will still be healthy in the mobile industry. This is due to the increased penetration of mobile into the mass consumer market, as well as continuing introduction of new services to stimulate demand (e.g. SMS, mobile Internet, video, etc.). Rogers, Bell (including Bell Ontario and Quebec only) and Microcell represent approximately 66% of the Canadian industry in terms of subscribers at the end of The rest of the industry being accounted for by Telus as well as the Bell-affiliated operators not included in Bell Mobility (Aliant, MTS, Sasktel, etc.). LYA Report - Comparative Spectrum Valuation March 2003 Page 8

12 Table 1 Subscriber forecast Combined Rogers, Bell, Microcell subs Subtotal % of industry 66% 66% 67% 67% 68% Rogers, Bell, Microcell subs 8,757,883 9,800,935 10,946,489 12,093,074 13,136,770 Growth per year 11% 12% 12% 10% 9% Microcell subscribers Microcell % of industry 10% 10% 11% 11% 11% Microcell % of covered pops 7% 8% 9% 10% 11% Microcell subs 1,312,453 1,500,786 1,725,550 1,970,267 2,212,160 Growth per year 13% 14% 15% 14% 12% Average Rogers, Bell subs 3,722,715 4,150,075 4,610,470 5,061,404 5,462,305 Growth per year 11% 11% 11% 10% 8% Historically Microcell typically experienced a higher growth rate than Rogers and Bell. In 2000 and 2001, for example, Microcell subscribers increased by 58% and 31% respectively, compared to the total of Rogers and Bell which increased by 20% and 22% respectively. This trend reversed in 2002, with Microcell subscribers declining slightly compared to the combination of Bell and Rogers which increased by 9%. Post re-structuring, the assumption used for analysis herein is that Microcell recovers to a more relatively favourable position than what was experienced in 2002, more consistent with its earlier success. Microcell though will remain considerably smaller than Rogers and Bell. This is shown above in Table 1, wherein Microcell grows by 2007 to represent 11% (and subsequently 13%) of the Canadian industry. 4 4 Note The tables presented herein show the first five years of the analysis. The valuations are done on a 10-year study basis, with operating parameters covering the entire period. LYA Report - Comparative Spectrum Valuation March 2003 Page 9

13 In terms of pricing, Microcell has led the industry in development of mass market consumer-oriented pricing. Packages are thus focused on attractive price points targeted at consumers and include a high number of minutes. The focus on the consumer segment has meant though that the resulting revenue per customer is typically lower than that of Rogers and Bell. From 1999 to 2002 Microcell s average revenue per user (ARPU) per month was 11% below the average of that of Rogers and Bell. 5 A difference of about 10% is assumed to remain over time as the other operators increase their targeting of the mass consumer market, maintaining pressure on Microcell s pricing. While voice ARPUs are likely to remain fairly flat going forward, added new services (notably SMS) should add to the industry ARPU over time. This is expected to add $2 to $3 per month in incremental ARPU. 5 The composite Rogers and Bell ARPU was $48.25 for the average of 1999 to 2002, whereas the Microcell ARPU averaged for the same years was $43, or approximately 11% lower. LYA Report - Comparative Spectrum Valuation March 2003 Page 10

14 3.2 Operating costs For analysis purposes, operating costs are estimated based on three key parameters operations costs per subscriber per month, churn and acquisition cost per gross addition. The 2002 industry results for these parameters are shown below. 6 Table 2 Industry operational parameters 2002 Opex per Churn Acquisition 2002 subscriber per month * cost/gross add Bell Mobility (estimate) $ % $ 404 Rogers AT&T Wireless $ % $ 396 Microcell $ % $ 290 * blended post-paid and pre-pay For forecasting purposes, operations costs per subscriber are not assumed to improve below the composite of Rogers and Bell. Microcell, which historically has been higher, is assumed to converge with the Rogers/Bell model average. One scenario for the evolution of churn and acquisition costs is shown below, wherein the industry experiences some improvement in both these parameters over time. It should be kept in mind that although industry expectations may be reflecting reduced churn and customer acquisition costs, there are many other possible scenarios. 7 6 Opex per subscriber includes operations expenses before financing costs and excluding customer acquisition costs. It is shown as reported by Microcell and Rogers. Bell is estimated based on 1998 reporting of Bell Mobility, assuming 10% improvement. Bell churn and acquisition costs are per BCE reporting. 7 The operations expense scenario reflects an evolution of the present day parameters without accounting for any future discontinuities which could effect them. For example, a major technology change could result in the need for completely new consumer devices. This could cause a jump in acquisition costs assuming the industry continues to subsidize sets. On the other hand, if handset subsidies are phased out, acquisition costs could decline further than shown. LYA Report - Comparative Spectrum Valuation March 2003 Page 11

15 Table 3 Operations expense parameters forecast Opex per average sub/month Rogers+Bell $ 18 $ 18 $ 18 $ 18 $ 18 Microcell $ 20 $ 19 $ 18 $ 18 $ 18 Microcell relative to Rogers, Bell 14% 7% 4% 2% 1% Churn per month Rogers+Bell 1.8% 1.8% 1.8% 1.7% 1.7% Microcell 3.1% 2.9% 2.7% 2.6% 2.4% Acquisition cost per gross add Rogers+Bell $ 388 $ 377 $ 365 $ 354 $ 344 Microcell $ 281 $ 294 $ 301 $ 304 $ 305 Microcell relative to Rogers, Bell -28% -22% -18% -14% -11% Also included in operations for valuation purposes is the assumption that operators continue to pay 2% of revenues for Scientific Research and Experimental Development (SR&ED) expenditures as a requirement of license. This is added to the operating expenditure, but is offset by a tax credit equivalent to 20% of the expenditure. LYA Report - Comparative Spectrum Valuation March 2003 Page 12

16 3.3 Network capital investment The network capital investment has two components for valuation purposes. Firstly, it is assumed at the start of the valuation model (i.e. at start of 2003) that the network of each of the modelled operators is acquired. This is done using estimated gross fixed assets for Rogers, Bell and Microcell at year-end Secondly, ongoing capital is required to augment the network as subscribers are added over time. The gross and net fixed assets for Rogers, Bell and Microcell are summarised below. 8 Table 4 Operator fixed assets 2002 Gross Net Bell Mobility $ 3,821,432 $ 2,738,491 est y.e Rogers $ 5,186,221 $ 2,371,133 year-end 2002 Microcell $ 1,420,083 $ 656,035 est y.e Microcell has gross fixed assets of approximately $1.4 billion. This is based on the historical gross fixed assets reported to year-end 2001 of $1.5 billion, less Microcell s MCS licenses, plus an estimate of 2002 capital expenditures of $127 million. 9 In addition to network assets, Rogers and Bell both were winning bidders in Industry Canada s 2001 auction of additional PCS spectrum. Rogers paid $393.5 million for 23 licenses and Bell $720.5 million for 20 licenses. The weighted average spectrum costs for Bell and Rogers are included in the initial gross 8 The figure for Bell is estimated using the cumulated in-year capital expenditures of Bell Mobility as reported by BCE. 9 In Microcell s restructuring there is reduction to net fixed assets of $407 million. Effects of this have been excluded. See Information Circular and Proxy Statement Pertaining to a Plan of Reorganization and of Compromise and Arrangement, Microcell Telecommunications Inc., February 17, 2003, page 56 LYA Report - Comparative Spectrum Valuation March 2003 Page 13

17 fixed assets that are assumed to be acquired to develop the valuation for the Rogers/Bell model. The mobile business requires significant ongoing investment. The past capital expenditures for Rogers, Bell and Microcell are summarised below, expressed in expenditure per added subscriber per year. 10 Table 5 Capital expenditure per added subscriber 1998 to Rogers $ 1,624 $ 965 $ 1,457 $ 1,370 $ 1,551 Bell Mobility $ 1,545 $ 847 $ 847 $ 612 $ 874 Microcell $ 936 $ 442 $ 820 $ 968 $ 968 There are considerable fluctuations in the figures, however over the five years, Microcell has consistently been lower than Rogers and Bell, over 30% on average. This is due to Microcell s tighter deployment focus on core metropolitan areas compared to Rogers and Bell which invest heavily in broad coverage of all regions of the country. Also, Microcell has operated only one network platform for its entire history. In the case of Rogers and Bell, both had significant and costly transitions to make, notably to change from analogue to digital, and then again from digital cellular to PCS and then to GSM in the case of Rogers. Given that Microcell continues with a similar network strategy going forward, it should expect some continued advantage in terms of investment requirements. This differential is 10 For Microcell, the 2002 figure is assumed to be the same as 2001 since in 2002, Microcell had a decline in subscribers. LYA Report - Comparative Spectrum Valuation March 2003 Page 14

18 assumed to decline to 10% below the Rogers/Bell model figure over time as shown below. 11 Table 6 Forecast of capital expenditure per added subscriber Rogers, Bell $ 1,150 $ 1,090 $ 1,034 $ 980 $ 930 Microcell $ 968 $ 913 $ 928 $ 880 $ 834 Microcell relative to Rogers, Bell -16% -16% -10% -10% -10% Rogers and Bell capital expenditures per added subscriber have declined from an average of over $2,000 in 1991 to about $1,200 in 2002, representing an annualised decline of 5% per year. This annualised decline is expected to continue until 2008, with a lower rate thereafter. The same decline is assumed to apply to Microcell as well the combination of Rogers and Bell in the Rogers/Bell model. 11 The forecast assumes a typical going forward per subscriber figure per year for capital expenditures. This provides a reasonable overall forecast, but may understate the effect of lump sum outlays that could be required in particular years (e.g. one time upgrades for service or coverage capabilities that would not vary specifically with customer additions). LYA Report - Comparative Spectrum Valuation March 2003 Page 15

19 3.4 Financing parameters The going forward business plans incorporate the existing gross network investment to date and thus also incorporate the existing long-term debt of the specific entities. For year-end 2002, this is shown below. 12 Table 7 Existing long-term debt Debt ($M) Bell Mobility $ 1,848 estimated at y.e Rogers $ 2,360 at y.e Microcell $ 350 post re-structuring In terms of cost of capital, Bell Canada (which includes Bell Mobility) is likely to have a lower cost than Rogers or Microcell. Bell Canada s cost of capital is summarised below. 13 Table 8 Bell Canada cost of capital Bell Canada % financed by debt 40% Interest rate on debt 7.0% Cost of equity 12% Income tax rate 40% AT-WACC 8.88% WACC before tax 10.0% For the Rogers/Bell model, the valuation should be done at a higher figure than that of Bell alone. For analysis purposes the cost of capital for the Rogers/Bell model is assumed to be 12%. 12 Bell Mobility is estimated based on % of revenues relative to Bell Canada total. Rogers is per Company reports. Microcell is shown post-restructuring since going forward interest payments will be based on the new level of debt and not the pre-restructuring level of debt. 13 Per letter of 16 August 2002 from Bell Canada et al to the CRTC Reply Comments on the Use of an After-Tax Weighted Average Cost of Capital (AT-WACC) in Phase II Cost Studies. LYA Report - Comparative Spectrum Valuation March 2003 Page 16

20 The cost of capital for Microcell will be higher than the average of the others, given that it is emerging from a restructuring process, and investors may be relatively more cautious in terms of participating. The Microcell WACC is assumed to be 14.2% for analysis purposes. This is estimated assuming 55% of financing as debt, cost of debt at 9% and a 25% cost of equity. This mix of financing and costs is used to provide a reasonable view of one possible WACC. It does not necessarily reflect Microcell s management expectations or any other postrestructuring financing activities Note A detailed evaluation to forecast cost of capital was beyond the scope of the present report. The WACC figures herein are used to illustrate the relative values and differences between the Rogers/Bell model versus the pro forma Microcell model. There could be significant differences in actual WACCs in the future. For valuation purposes, the study period is 10 years starting in End of study value is calculated as 8 times the year 10 cash flow. Higher end of study multiples would result in higher valuations. LYA Report - Comparative Spectrum Valuation March 2003 Page 17

21 4. Valuation of two business opportunities 4.1 Incumbent cellular/pcs operator (Rogers/Bell model) The operator represented by the Rogers/Bell model would have pro-forma revenues of $3.9 billion in 2012, double those of It will have over $8 billion in gross network assets, including the assumed acquisition of assets at the start. 15 Table 9 Rogers/Bell Model Pro forma cash flow and valuation $M PWNCF Revenues Operating Taxes Capital 2002 Expenses 2003 $ (4,862) $ 1,956 $ 1,228 $ - $ 5, $ 264 $ 2,196 $ 1,343 $ - $ $ 352 $ 2,523 $ 1,474 $ - $ $ 331 $ 2,831 $ 1,591 $ 173 $ $ 350 $ 3,105 $ 1,679 $ 315 $ $ 378 $ 3,338 $ 1,743 $ 427 $ $ 388 $ 3,532 $ 1,793 $ 527 $ $ 379 $ 3,691 $ 1,834 $ 615 $ $ 356 $ 3,836 $ 1,878 $ 694 $ $ 3,557 $ 3,943 $ 1,891 $ 746 $ 139 Total $ 1,494 $ 30,951 $ 16,453 $ 3,497 $ 8,366 The present value of the business plan using a 12% cost of capital is $1.5 billion or $63 per head of population covered, or $1.01 per licensed pop per MHz PWNCF present worth of net cash flows is provided for each year (Revenues Opex Capital, expressed at year-end 2002) and in total. Taxes shown should be considered as approximate and are included for completeness. A detailed tax analysis was beyond the scope of the Report. A tax rate of 40% was assumed for all entities for comparison purposes. Cash flows incorporate taxes at this rate, net of operational tax loss carry forwards calculated based on net income before tax in the business plan cash flows. Embedded (pre-2003) tax losses or transactions that could reduce taxes in the future (other than operational carry-forwards) are not included in the analysis. 16 Rogers and Bell were initially licensed with 25 MHz of cellular spectrum. To this they added 10 MHz in all markets in the 1995 PCS awards. In the 2001 auction, Bell acquired an additional 20 MHz in Southern LYA Report - Comparative Spectrum Valuation March 2003 Page 18

22 4.2 New entrant (Microcell) Microcell would have pro forma revenues of $1.6 billion in 2012, more than double those projected for 2003, but remaining considerably smaller than the Rogers/Bell model. Microcell would have $3 billion in network assets, including the investment made to date. Table 10 Microcell Pro forma cash flow and valuation $M PWNCF Revenues Operating Taxes Capital 2002 Expenses 2003 $ (1,357) $ 592 $ 453 $ - $ 1, $ (11) $ 706 $ 534 $ - $ $ 2 $ 836 $ 600 $ - $ $ 30 $ 973 $ 670 $ - $ $ 66 $ 1,111 $ 733 $ - $ $ 100 $ 1,241 $ 785 $ - $ $ 127 $ 1,361 $ 827 $ - $ $ 110 $ 1,471 $ 862 $ 93 $ $ 93 $ 1,580 $ 902 $ 181 $ $ 1,184 $ 1,668 $ 915 $ 215 $ 113 Total $ 345 $ 11,540 $ 7,282 $ 489 $ 2,988 The present value of the business plan using a 14% cost of capital is $345 million, or $18 per covered head of population or $0.40 per licensed pop per MHz. Ontario and 10 MHz in other Ontario and Quebec markets. Rogers acquired an additional 10 MHz in Southern Ontario and 20 MHz in its other markets. The Rogers/Bell average is estimated to have 51 MHz of spectrum in its markets. Microcell has one 30 MHz PCS license. Licensed pops are assumed to be the entire country 28,846,761 the 1996 Census figure used by Industry Canada. See Consultation on a New Fee and Licensing Regime for Cellular and Incumbent Personal Communications Services (PCS) Licensees, December 2002, page 13 LYA Report - Comparative Spectrum Valuation March 2003 Page 19

23 4.3 Observations and assessment Given its larger absolute size over the period of the pro forma business plan, the Rogers/Bell model has a larger absolute value. The higher valuation is largely a function of the fact that at the outset of the study, the Rogers/Bell model is starting with almost three times as many subscribers as Microcell. This illustrates the differential attributable to Rogers/Bell as a large incumbent compared to Microcell as a relatively new entrant. The incumbent franchise has a higher intrinsic value than that of a third in player. Even when evaluated at the same cost of capital an unlikely scenario the Microcell valuation is almost 40% lower than that of the Rogers/Bell model on a per pop basis. Table 11 Comparison of valuation results at same cost of capital Rogers/Bell Microcell model model NPV -- total ($M) $ 1,494 $ per covered pop $ 63 $ per covered pop/mhz $ 1.24 $ per licensed pop/mhz $ 1.01 $ 0.79 IRR 16% 18% WACC 12.0% 12.0% Value per licensed pop per MHz would be 20% lower for Microcell; it has fewer covered pops but also a smaller license capacity. On the other hand, the pro forma Microcell would have a higher internal rate of return (IRR) at the same cost of capital given its smaller size and lower absolute up front investment. LYA Report - Comparative Spectrum Valuation March 2003 Page 20

24 The above figures assume the same cost of capital for the average of Rogers and Bell relative to Microcell. However, given that Microcell is emerging from a restructuring process and is a much smaller player than either of the other two, it is more likely that its cost of capital will continue to be higher. The case where Microcell experiences higher financing costs is shown below. Table 12 Comparison of valuation results higher cost of capital Rogers/Bell Microcell model model NPV -- total ($M) $ 1,494 $ per covered pop $ 63 $ per covered pop/mhz $ 1.24 $ per licensed pop/mhz $ 1.01 $ 0.40 IRR 16% 17% WACC 12.0% 14.2% Based on the analyses done herein, the value of the business plan of Microcell is 60% lower on a per licensed pop per MHz basis compared to that of the modelled incumbent cellular/pcs operator. This assumes a conservative differential in the cost of financing with Microcell cost at 2% higher than the Rogers/Bell model on average. On a per pop basis (i.e. excluding the differential associated with the relative size of the licenses) Microcell s valuation is 70% lower than the Rogers/Bell model result Business plan values relative to proposed license fees In its fee consultation, Industry Canada has proposed a new fee regime which would be applied based on the population of the geographic area licensed. The fee would be $0.052 LYA Report - Comparative Spectrum Valuation March 2003 Page 21

25 per 1 MHz of assigned spectrum per pop, phased in over a seven year period. This is summarised below. 17 Table 13 - Proposed Industry Canada license fees Proposed fee $/MHz/pop 2003 $ $ $ $ $ $ $ $ In present value terms (evaluated at the same WACC as for the business plan valuations), the proposed fees equate to $0.23 per licensed pop per MHz using a WACC of 14.2% (i.e. the same WACC as used in the Microcell model), or $0.25 using a WACC of 12%. 18 The license fee proposal thus represents by itself almost 60% of the entire value of the pro forma Microcell business plan. In the case of the Rogers/Bell model, the fee has an impact of 25% of the business plan value. The impact of these fees on the business cases of all of the modelled operators is substantial, but has a more severe impact on the new entrant (Microcell) valuation. 17 Consultation on a New Fee and Licensing Regime for Cellular and Incumbent Personal Communications Services (PCS) Licensees, Industry Canada, December 2002, page 13 and the associated Transition Fee Estimation Tool. 18 Evaluated on a 10-year basis, assuming the same fee in 2011 and 2012 as identified by Industry Canada for LYA Report - Comparative Spectrum Valuation March 2003 Page 22