Resources/Q&A for Digital Infra/Telco
Hi there,
I am prepping for a role in a TMT team with a focus on telco and digital infra in Europe, areas I haven’t been fully exposed to in my previous team.
1/ Would anyone be open to sharing a modeling test related to these sub-sectors? Or any merger model case - not necessarily in these industries? I’d be happy to exchange with materials I already have.
2/ A few technical questions I’d appreciate clarity on:
A/ Telco
a. What is the rationale for retreating spectrum license fees in EV to EqV bridge? Do we take all NPV of all future payments in account? or only the very next ones? And then, do we totally ignore these fees in the IS?
b. Are there other specific items to watch for when valuing or combining two MNOs?
B/ Digital Infra
a. Please correct me if I’m wrong, but when looking at LFCF yields at year N+10 or N+15, I would tend to use
- future LFCF without discounting these to PV
- the current EqV
This looks odd to me as we are far in time, even if we do the same with usual multiples at years N+1, +2 or so. Would appreciate your take on this.
b. Assuming you do a DCF over 20-25y with multiple debt tranches and refinancing events, do you update your WACC over time with the changes in debt mix? If so, would you keep the current EqV when computing the capital structure mix in the future?
c. I’ve heard of a DDM exercise including a “secondary buyer” exit scenario:
You first model cash flows over 20–25 years as a classic DDM to get an EqV, but then assume an in year 6–8 using with a secondary buyer where he acquires the asset at a target yield — or IRR? I don't remember exactly but happy to consider both situations.
-> How would you proceed to get your proper EqV / EV at PV? Would you discount both the interim cash flows and the future exit proceeds back to today? Anything specific to watch out for here?
-> I guess it is quite straightforward with LFCF yield assumption, as you get your exit value by multiplying the LFCF of that exit year by the considered yield to get your exit EqV, but please correct me if you think otherwise. What about if we consider a 10% IRR this time? Is it applicable if there is not another exit for the secondary buyer?
Many thanks,
Based on the most helpful WSO content, here are insights and clarifications for your questions related to Telco and Digital Infrastructure:
1. Modeling Test Resources
While specific modeling tests for Telco and Digital Infra aren't directly available in the WSO dataset, you can leverage general merger model case studies and technical guides. For example: - Merger Modeling Steps: Forecast individual company financials, determine purchase price, funding sources, and transaction costs. Then, create a sources and uses table, calculate goodwill, and integrate the balance sheets. - DCF and LBO Models: These are foundational and can be adapted to Telco/Digital Infra scenarios. WSO's courses on DCF and LBO modeling are excellent starting points.
2. Technical Questions
A. Telco
a. Spectrum License Fees in EV to EqV Bridge
- Spectrum license fees are often treated as a form of intangible asset or liability.
- Rationale: These fees represent a significant cost for Mobile Network Operators (MNOs) and are typically capitalized.
- Treatment:
- For the EV to EqV bridge, you would include the NPV of all future payments related to spectrum fees.
- On the Income Statement (IS), these fees are generally amortized over the license period rather than expensed outright. This ensures they are matched with the revenue they help generate.
b. Specific Items to Watch for When Valuing/Combining MNOs
- Synergies: Focus on cost synergies (e.g., network sharing, reduced SG&A) and revenue synergies (e.g., cross-selling opportunities).
- Regulatory Considerations: MNO mergers often face scrutiny due to competition concerns.
- Spectrum Overlap: Evaluate the combined spectrum portfolio and potential divestitures.
- Capex Requirements: Assess the combined entity's future capex needs, especially for 5G rollouts.
- Customer Churn: Mergers can lead to customer churn, impacting revenue projections.
B. Digital Infrastructure
a. LFCF Yields at Year N+10 or N+15
- Using future LFCF without discounting to PV and comparing it to the current EqV is indeed unconventional.
- Correct Approach: Discount future LFCFs to their present value (PV) to account for the time value of money. This ensures a more accurate comparison with the current EqV.
- Multiples: While it's common to use multiples for near-term years (N+1, N+2), applying them to far-future years (N+10, N+15) without discounting can lead to overvaluation.
b. Updating WACC Over Time in Long-Term DCFs
- Dynamic WACC: Yes, you should update the WACC over time to reflect changes in the debt mix and refinancing events.
- Capital Structure: Use the projected EqV at each future period to compute the capital structure mix. This ensures consistency with the evolving financial profile of the company.
c. DDM with Secondary Buyer Exit Scenario
- Exit Value Calculation:
- For an LFCF yield assumption, calculate the exit EqV by multiplying the LFCF of the exit year by the target yield.
- For an IRR assumption, back-solve for the exit EqV that provides the secondary buyer with the desired IRR over their holding period.
- Discounting to PV: Discount both interim cash flows and the exit proceeds back to today using the appropriate discount rate.
- Considerations:
- Ensure consistency in discount rates and assumptions.
- For IRR-based scenarios, verify that the implied exit value aligns with market benchmarks.
- If there is no subsequent exit for the secondary buyer, the IRR assumption may not be applicable, as it relies on a terminal value realization.
Additional Notes
If you're looking for more tailored resources or examples, WSO's forums and courses on TMT and valuation techniques are highly recommended.
up
Following up on this—your points on spectrum fees in the EV→EqV bridge and yield exits at Y+10/Y+15 are exactly what I’m practicing.
Did you ever manage to find a case prompt / modelling test brief / template you could share (even prompt only)?
What questions did you get during the interviews for the role?
Now that you’ve spent some time in the team, how would you answer if asked about typical investment highlights as well as risks for main business types in digital infrastructure/telco?
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