How can you value an asset that provides zero revenue stream and sits underneath land and sea?
Telecommunications corporations, large financial institutions and increasingly social media networks rely on the speed, connection reliability and cost savings that dark fibre networks offer.
But if you’re involved in financial reporting, capital budgeting or funding, how on earth it is possible for you to value a dormant pan-European dark fibre network?
The good news is, we have recently gained a lot of experience in this area. As a result, we’ve a tried and tested formula.
Let me walk you through it.
Firstly, what is dark fibre?
Traditionally, Dark Fibre referred to surplus unused installed fibre or a ‘dark’ network infrastructure owned by managed service providers.
The term has now evolved to encompass the practice of leasing ‘dark’ fibre optic cables. Here a client will lease unused strands of ‘dark’ fibre optic cable to create its own privately-operated optical fibre network.
Organisations typically lease dark fibre for 20 years. They may provide the photonics equipment and handle operations and maintenance.
Organisations using dark fibre enjoy:
• Exclusive access, not shared with other users
• Higher capacity and signal strength
• A much more secure alternative to buying managed bandwidth
How much does dark fibre cost?
The initial capital cost to lay and install dark fibre can be significant.
A recently completed UK to Japan route cost £556m. In comparison, a shorter UK to Eire cable cost over €10m.
Costs are dependent upon specification and routing. By this I mean sub-sea or terrestrial and then rural or urban.
Laying-vessel hire and civil engineering costs see the majority of the cost incurred.
What is the physical life of dark fibre?
Although largely untested, the assets fall into two physical life categories:
- Fibre and duct: 30-50 years life resulting in potentially significant depreciated replacement cost values
- Photonics equipment: 3-8 years life, affected by ever-increasing technical obsolescence
But does cost equate to the value of dark fibre?
Traditionally the market has given limited credence to cost. It prefers to measure value based upon the market drivers that deliver revenue and value.
So how we approach valuing dark fibre?
Cost, income and market approaches are all typically used to value capital assets.
So to begin with, asset valuers need to identify relevant and measurable value drivers for dark fibre networks.
Of course, the obvious and most appropriate valuation approach would be income.
But as the dormant dark fibre is by definition commercially non-operational, using this approach would provide a meaningless low value.
So, the only realistic approach left to valuers is to analyse other comparable market transactions.
Let me explain. Dark fibre feature two types of market transactions.
1. Asset transactions
Comparable asset transactions do exist. But their value is not as simple as dividing the transaction price by the length of the fibre route to calculate a €/km.
To determine the value of dark fibre, you must weight and analyse in detail many different factors, including:
- Fibre and duct age and specification
- Connectivity and routeing
- Access (wayleaves and landing points)
- Resilience (fibre and end-points).
At the same time, you need to take into account the relevance of:
- Strategy behind the transaction
- Revenue potential
While transactions are often reported as asset acquisitions and not IFRS business combinations, any strategic value or ongoing customers etc. effectively form part of the asset purchase price.
Hence, as this approach incorporates non-tangible asset value it can often overstate the pro-rata value of the tangible assets.
2. Indefeasible right of use (IRU) rates
IRU rate data provides a capital cost based on capacity and/or the number of fibre pairs leased over a 20-year period.
Data is available for most major subsea routes. But it’s unlikely information for shorter routes or terrestrial fibre will be available.
Owner’s balance sheets capitalise dark fibre assets. So they provide an accurate comparable capital cost.
But, they’ll find material differences in specification between the assets.
Measuring and analysing these differences is a must. Particularly before incorporating them into any comparable analysis or valuation.
So what does this all mean?
Asset valuers must apply different valuation approaches to get a comprehensive range of comparable values.
To get an evidence-based comparable market value, they must further analyse and compare the available transactions in detail.
For more information about asset valuation of dark fibre, or indeed asset valuation in the telecommunications sector do get in touch.
The author: Tim Chapman FRICS MSc, is a specialist capital assets valuer with over 25 years’ experience. As a director at Hickman Shearer, he has performed many telecommunication asset valuations, more recently advising investors and lenders in the acquisition of a pan-European dark fibre network.