the relative value of a pure-play pcs operator compared to an

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

The relative value of a pure-playPCS operator compared to an incumbent

mobile carrier in Canada

Report presented toMicrocell Telecommunications Inc.

March 2003

LYA Report - Comparative Spectrum Valuation – March 2003 Page i

Table of Contents

1. EXECUTIVE SUMMARY................................................................................................................. 1

2. INTRODUCTION ............................................................................................................................... 4

3. COMPARATIVE BUSINESS PLAN PARAMETERS.................................................................... 7

3.1 SUBSCRIBER FORECAST, MARKET SHARE AND REVENUES.................................................................. 73.2 OPERATING COSTS........................................................................................................................... 113.3 NETWORK CAPITAL INVESTMENT..................................................................................................... 133.4 FINANCING PARAMETERS................................................................................................................. 16

4. VALUATION OF TWO BUSINESS OPPORTUNITIES.............................................................. 18

4.1 INCUMBENT CELLULAR/PCS OPERATOR (ROGERS/BELL MODEL).................................................... 184.2 NEW ENTRANT (MICROCELL) .......................................................................................................... 194.3 OBSERVATIONS AND ASSESSMENT................................................................................................... 20

4.3.1 Business plan values relative to proposed license fees ......................................................... 21

Tables and figures

Table 1 – Subscriber forecast.......................................................................................................................... 9Table 2 – Industry operational parameters 2002........................................................................................... 11Table 3 – Operations expense parameters forecast ....................................................................................... 12Table 4 – Operator fixed assets 2002............................................................................................................ 13Table 5 – Capital expenditure per added subscriber 1998 to 2002 ............................................................... 14Table 6 – Forecast of capital expenditure per added subscriber ................................................................... 15Table 7 – Existing long-term debt................................................................................................................. 16Table 8 – Bell Canada cost of capital ........................................................................................................... 16Table 9 – Rogers/Bell Model – Pro forma cash flow and valuation ............................................................. 18Table 10 – Microcell – Pro forma cash flow and valuation .......................................................................... 19Table 11 – Comparison of valuation results at same cost of capital ............................................................. 20Table 12 – Comparison of valuation results – higher cost of capital ............................................................ 21Table 13 - Proposed Industry Canada license fees........................................................................................ 22

Figure 1 – LYA Canadian mobile subscriber forecast .................................................................................... 8

LYA Report - Comparative Spectrum Valuation – March 2003 Page 1

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.


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 Microcellmodel model

NPV -- total ($M) 1,494$ 345$ -- per covered pop 63$ 18$ -- per covered pop/MHz 1.24$ 0.61$ -- per licensed pop/MHz 1.01$ 0.40$ IRR 16% 17%WACC 12.0% 14.2% Lemay-Yates Associates Inc., 2003

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.


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.


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.


• 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


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), andEnhanced Specialized Mobile Radio (ESMR) Licenses; Cots Contract # U4200-6-0008, January 21, 19972 Ibid, Appendix 4 – Estimates were provided for an “alternate” forecast (wherein PCS subscribersexceeded cellular (which more closely represents the split of subscribers in the market at present). Thevaluation 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.


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

2012.


Figure 1 – LYA Canadian mobile subscriber forecast

0%

10%

20%

30%

40%

50%

60%

70%

80%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

% o

f pop

ulat

ion

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

Num

ber o

f sub

scrib

ers

Penetration of populationTotal industry subs

Lemay-Yates Associates Inc., 2003

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 2002.3

3 The rest of the industry being accounted for by Telus as well as the Bell-affiliated operators not includedin Bell Mobility (Aliant, MTS, Sasktel, etc.).


Table 1 – Subscriber forecast2003 2004 2005 2006 2007

Combined Rogers, Bell, Microcell subsSubtotal % 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 subscribersMicrocell % 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% Lemay-Yates Associates Inc., 2003

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 a10-year study basis, with operating parameters covering the entire period.


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 MicrocellARPU averaged for the same years was $43, or approximately 11% lower.


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 2002Opex per Churn Acquisition

2002 subscriber per month * cost/gross addBell Mobility (estimate) 20.00$ 1.6% 404$ Rogers AT&T Wireless 15.71$ 2.0% 396$ Microcell 23.00$ 3.3% 290$ * blended post-paid and pre-pay Lemay-Yates Associates Inc., 2003

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 customeracquisition costs. It is shown as reported by Microcell and Rogers. Bell is estimated based on 1998reporting of Bell Mobility, assuming 10% improvement. Bell churn and acquisition costs are per BCEreporting.7 The operations expense scenario reflects an evolution of the present day parameters without accountingfor any future discontinuities which could effect them. For example, a major technology change could resultin the need for completely new consumer devices. This could cause a jump in acquisition costs assuming theindustry continues to subsidize sets. On the other hand, if handset subsidies are phased out, acquisition costscould decline further than shown.


Table 3 – Operations expense parameters forecast2003 2004 2005 2006 2007

Opex per average sub/monthRogers+Bell 18$ 18$ 18$ 18$ 18$ Microcell 20$ 19$ 18$ 18$ 18$ Microcell relative to Rogers, Bell 14% 7% 4% 2% 1%Churn per monthRogers+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 addRogers+Bell 388$ 377$ 365$ 354$ 344$ Microcell 281$ 294$ 301$ 304$ 305$ Microcell relative to Rogers, Bell -28% -22% -18% -14% -11% Lemay-Yates Associates Inc., 2003

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.


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 2002. 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 2002Gross Net

Bell Mobility 3,821,432$ 2,738,491$ est y.e. 2002Rogers 5,186,221$ 2,371,133$ year-end 2002Microcell 1,420,083$ 656,035$ est y.e. 2002 Lemay-Yates Associates Inc., 2003

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 asreported by BCE.9 In Microcell’s restructuring there is reduction to net fixed assets of $407 million. Effects of this have beenexcluded. See Information Circular and Proxy Statement Pertaining to a Plan of Reorganization and ofCompromise and Arrangement, Microcell Telecommunications Inc., February 17, 2003, page 56


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 20021998 1999 2000 2001 2002

Rogers 1,624$ 965$ 1,457$ 1,370$ 1,551$ Bell Mobility 1,545$ 847$ 847$ 612$ 874$ Microcell 936$ 442$ 820$ 968$ 968$ Lemay-Yates Associates Inc., 2003

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 declinein subscribers.


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 subscriber2003 2004 2005 2006 2007

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% Lemay-Yates Associates Inc., 2003

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 berequired in particular years (e.g. one time upgrades for service or coverage capabilities that would not varyspecifically with customer additions).


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 debtDebt ($M)

Bell Mobility 1,848$ estimated at y.e. 2002Rogers 2,360$ at y.e. 2002Microcell 350$ post re-structuring Lemay-Yates Associates Inc., 2003

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 Companyreports. Microcell is shown post-restructuring since going forward interest payments will be based on thenew 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 anAfter-Tax Weighted Average Cost of Capital (AT-WACC) in Phase II Cost Studies”.


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 post-

restructuring financing activities.14

14 Note – A detailed evaluation to forecast cost of capital was beyond the scope of the present report. TheWACC figures herein are used to illustrate the relative values and differences between the Rogers/Bellmodel versus the pro forma Microcell model. There could be significant differences in actual WACCs in thefuture. For valuation purposes, the study period is 10 years starting in 2003. End of study value is calculatedas 8 times the year 10 cash flow. Higher end of study multiples would result in higher valuations.


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 2003. 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 Expenses2003 (4,862)$ 1,956$ 1,228$ -$ 5,484$ 2004 264$ 2,196$ 1,343$ -$ 435$ 2005 352$ 2,523$ 1,474$ -$ 459$ 2006 331$ 2,831$ 1,591$ 173$ 447$ 2007 350$ 3,105$ 1,679$ 315$ 396$ 2008 378$ 3,338$ 1,743$ 427$ 328$ 2009 388$ 3,532$ 1,793$ 527$ 267$ 2010 379$ 3,691$ 1,834$ 615$ 218$ 2011 356$ 3,836$ 1,878$ 694$ 193$ 2012 3,557$ 3,943$ 1,891$ 746$ 139$

Total 1,494$ 30,951$ 16,453$ 3,497$ 8,366$ Lemay-Yates Associates Inc., 2003

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. 16

15 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 areincluded 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 ofoperational tax loss carry forwards calculated based on net income before tax in the business plan cashflows. Embedded (pre-2003) tax losses or transactions that could reduce taxes in the future (other thanoperational 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 inall markets in the 1995 PCS awards. In the 2001 auction, Bell acquired an additional 20 MHz in Southern


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 Expenses2003 (1,357)$ 592$ 453$ -$ 1,470$ 2004 (11)$ 706$ 534$ -$ 153$ 2005 2$ 836$ 600$ -$ 192$ 2006 30$ 973$ 670$ -$ 207$ 2007 66$ 1,111$ 733$ -$ 203$ 2008 100$ 1,241$ 785$ -$ 187$ 2009 127$ 1,361$ 827$ -$ 167$ 2010 110$ 1,471$ 862$ 93$ 151$ 2011 93$ 1,580$ 902$ 181$ 146$ 2012 1,184$ 1,668$ 915$ 215$ 113$

Total 345$ 11,540$ 7,282$ 489$ 2,988$ Lemay-Yates Associates Inc., 2003

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 inSouthern Ontario and 20 MHz in its other markets. The Rogers/Bell average is estimated to have 51 MHzof spectrum in its markets. Microcell has one 30 MHz PCS license. Licensed pops are assumed to be theentire country – 28,846,761 – the 1996 Census figure used by Industry Canada. See “Consultation on a NewFee and Licensing Regime for Cellular and Incumbent Personal Communications Services (PCS)Licensees”, December 2002, page 13


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



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.


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



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.

4.3.1 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


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 0.028888$ 2004 0.032190$ 2005 0.035491$ 2006 0.038793$ 2007 0.042094$ 2008 0.045396$ 2009 0.048697$ 2010 0.051999$

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 CommunicationsServices (PCS) Licensees, Industry Canada, December 2002, page 13 and the associated “Transition FeeEstimation Tool”.18 Evaluated on a 10-year basis, assuming the same fee in 2011 and 2012 as identified by Industry Canadafor 2010.

the relative value of a pure-play pcs operator compared to an

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