Valuation question - How to value govt offered exclusivity
Hey all,
Just out of curiosity and asking as i think i may have to do this in the near future, any idea how to value Govt offered exclusivity in the sense of having exclusive rights to offer access to a technology infrastructure buildout being undertaken? Just thought i'd ask to get some feelers before doing some of my own research.
Never done this but I was thinking of valuing it by using a formula such as: for year 1: [forecast total traffic across bandwidths offered given assumed monopoly/duopoly price and other assumptions MULTIPLIED BY said assumed monopoly/duopoly price] LESS assumed ITDA for year 1 (as in EBITDA minus the EB]] and SUMMING the result over x years where x is the number of years of exclusivity offered.]
Would also apply relevant discounting factor to the forecast figures.
Will have to fine tune the above as the above is off the top of my head, but does this sound like its on the right track or am i completely off?
Honestly, you posed your Q in such a way, I'm not even sure I know what you're talking about.
However, simplifying what you wrote... let's say that you are going to value intellectual property, as in "exclusive rights" obtained through an IP licensing agreement on a tradename, something like that.
Then in that case you start by building out a DCF like you would any other valuation. Except what you're going to do is apply the "Relief-from-Royalty" method. The premise being that someone is going to pay a percentage of revenue for the use of the tradename, right? You would apply a royalty rate against the forecasted revenues that are attributable to the licensed technology. The royalty rate you select would be based on what's currently being used in the industry for the type of technology that's being licensed. You discount your cash flows to present value using the discount rate which you built up using CAPM etc. yadda yadda...
Is this what you were looking for? If not, then I dunno.
Hey aadpepsi, Thanks for the input, and sorry if the q was poorly phrased. Agree with you on the relief from royalty method as a basis for valuing IP, but i was actually after valuing something like a Govt concession in project financing. That is, a government granted right for a contractor to have the exclusive right to offer access to a particular technology, for which the contractor undertook to do the infrastructure buildout, even though substitutes may be possible/available.
In other words, it removes the incentive for others to build substitutes while providing a means to achieve higher returns than would be possible in a competitive scenario with substitutes available. For instance, giving a telco player exclusive rights to offer GSM service after they built out the country's first GSM network (plausible, barely, 15 years ago perhaps). In this case, it might be a broadband network buildout. Thats where i was coming from.
An exclusive right would give you 100% market share in that sector, so size and value the market, and estimate a time frame to saturate the market with your new technology.
If you keep it simple you can size the market and project it's growth based on your factors.
For example, assume Apple gives you an exclusive license to sell the new I-phone in your state. How would you value your company?
Do a simple market sizing, start from population, and go into demographics, then probability for a 15-25yr. old rich kid to buy your $1000 I-phone (i.e. think demographics).
Follow this approach to size the market, and estimate your adoption and growth rates. With your known price range, and growth rate based on the market sizing/share you should be able to project revenues, and do your valuation.
If you can't do this, call McKinsey. They'll be glad to help, but engagement fees run like $20,000/hr.
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