Beta

As mentioned above, the determination of the systematic risk of risk assets quoted on the stock exchange is based on the CAPM methodology. Systematic risk is the general risk in the market, representing the risk related to all aspects (e.g. political, economic, etc.) which can impact the behaviour of investors. This risk is distinct from the individual risk of each of the listed securities, being a risk of the market as a whole, and therefore is also called non-diversifiable risk, given that it cannot be reduced or hedged by diversifying the portfolio across various sectors or industries.

The share's systematic risk is defined by calculating its Beta, which in the context of defining the company's cost of capital corresponds to the equity beta.

Currently, to determine the Beta to be considered in the cost of capital - given that the company is not listed on the stock market - PTC uses the value that results from the historical return on the securities of PT SGPS relative to return on market as a whole.

However, the Beta of PT SGPS does not provide a true reflection of the risk associated with the return of PTC, since the risks associated with these two companies are different, especially considering the geographies in which they are present and the services which they offer.

In light of the above, two alternative methodologies were considered to calculate the Beta: i) to estimate the Beta of PTC based on a benchmark of companies which have similar activities or, ii) to seek to infer the beta of PTC on the basis of the Beta of PT SGPS.

As regards the second alternative, it would be necessary to calculate the beta of each activity, performing a careful economic analysis of each one in the different geographies in which they operate, an exercise which, in the case of operations not present in the stock market (for example the activity TMN) would necessarily involve the use of benchmarking.

Subsequently, it would be necessary to evaluate the activities mentioned above in order to assess their impact on the Beta of PT SGPS. In most of the assessments made by analysts, who use the more common methodologies, such as Discounted Cash Flow and the Enterprise value/EBITDA ratio, the results can vary depending on the assumptions used.

Accordingly, given the discretion inherent in any market valuation of the company's activities, the alternative which could be considered would consist of the evaluation of each activity of Grupo PT, at book value, which could have several limitations arising, for example, from the fact that the assets have different maturities and are often shared between different activities.

Accordingly, it is considered that the most appropriate methodology to estimate the Beta of PTC is that based on a benchmark of companies with similar activities, which methodology is also recommended by PwC ¹ and is included in the methodologies considered by the IRG in the development of the PIB on the methodology for calculating Beta (PIB 8) ².

In the definition of a Benchmark, its composition needs to be established, with two possible options: (i) comparable companies and (ii) regulatory precedent.

With regard to a Benchmark of comparable companies (See Table 5), ICP-ANACOM deems the methodology proposed by PwC to be appropriate ³, having the following underlying characteristics:

- definition of a set of companies based on the following criteria: per capita income of the respective countries; offer of similar products and services; market position; rate of growth and company valuation. The Beta of PT SGPS was also considered, despite reservations arising from its consideration in isolation, given the range of geographic markets and services encompassed.

- Use of the Harris and Pringle model ⁴ to calculate the equity betas of comparable companies. The formula allows the asset's beta to be calculated, i.e., the Beta without the effect of capital structure and later leveraged with the capital structure defined as optimal ⁵ for PTC;

- frequency of observations: Beta can be estimated through observations made on a daily, weekly, monthly or quarterly basis. The number of observations is very important because it contributes to the reduction of uncertainty in the estimation. Indeed,  as found with respect to the risk-free interest rate, the use of monthly observations was selected;

- period of time: the consideration of a short series may distort the results and miss relevant information. Indeed, the most recent observations contain effects which may not correctly represent future expectations, whereby series should be used which have a period long enough to correct the effects of volatility that can be felt in the short term. The Beta contains fluctuations over the business cycles of the company and it is noted that, in fact, PT has been undergoing significant changes with respect to the structure of its activities since 1995, with the liberalization of the sector, the internationalization of the group, technological innovation and the diversification of the services it provides. It is considered that, in this context, the period of the series should incorporate the observations which are relevant, in order to ensure that the result is robust and representative of the risks inherent in the company's current structure. According to PwC’s report, there is a notable preference among European regulators ⁶ for periods of 2 to 5 years. Therefore, it is deemed  appropriate to use a period of 5 years, providing for a high level of robustness and dependability in the results obtained;

- Beta data is taken from Bloomberg and corresponds to the values resulting from the Bayes formula, i.e. adjusted Beta ⁷. This adjustment provides a more robust estimate and less volatile fluctuations.

As regards the Benchmark of regulatory precedent, the regulators selected ⁸ were those with recent decisions on Beta for the fixed business (See Table 5).

Source: PwC 2009 report and ICP-ANACOM calculations (see Annex A)

However, with respect to the selection of comparable companies, it is important to note that, as indicated by PwC in its report, whereas not all the criteria defined as desirable from the outset for comparative purposes have been wholly fulfilled, only those companies that come closest were selected. Meanwhile, data on recent regulatory decisions (2008) is restricted to a relatively small set of countries.

ICP-ANACOM, weighing all the constraints, takes the position that the determination of PTC's Beta should result from the average of the Betas calculated based on benchmarks using comparable companies and regulatory precedents, which value corresponds to 0.85.