Cell C deals Blue Label worst blow in 10 weeks

Full-year loss at SA’s third-biggest mobile operator more than double its market capitalisation

The share price of Cell C’s biggest shareholder, Blue Label Telecoms, had its worst fall in more than 10 weeks after it reported a full-year loss that was equal to more than double its market capitalisation.

Blue Label, which owns 45% of Cell C, said on Thursday that trading losses and debt problems at SA’s third-largest mobile operator helped push it into a R6.6bn loss for the year to endMay. The company has a market capitalisation of about R2.71bn.

After months of speculation on the full effect of Cell C’s declining fortunes on Blue Label, the news appeared to shock the market, slashing the JSE-listed company’s share price more than 12% to R2.96, bringing its 2019 loss to 45%. In 2018, it plunged almost 64%.

Blue Label swung into a headline loss per share of 312.49c in the year to end-May, from headline earnings per share of 130.44c previously, as it wrote down its holding in Cell C by a further R2.52bn at the end of the period, bringing it to nil.

Cell C CEO Douglas Craigie Stevenson has the tough task of turning operations around. The country’s third-largest mobile operator is under pressure to adapt its business model or die.

Craigie Stevenson said the operator has always struggled to spend as much as its main competitors to expand its network, and was looking to shift gears by using its roaming to save costs, while delivering a better quality network experience.

“We want to exist. We want to compete,” he said.

Peter Takaendesa, a portfolio manager at Mergence Investment Managers, said “that without changing the business model, they’ll be back here again”. He said that Cell C’s recapitalisation efforts will amount to nothing if the operations do not change. In 2017, Blue Label injected R5.5bn into the business, but that money has been used up. Cell C now owes more than R8bn.

Takaendesa said Cell C’s admission that it did not have enough to spend on building its network to compete with Vodacom and MTN was a step in the right direction in finding a new way to run its operations.

Steve Ambrose of Strategy Worx echoed this sentiment,, saying there was no room for Cell C to grow its revenue in today’s economy. The only way forward was to change its structure and cut costs. The operator has no choice but to make the change, he said,. With Cell C’s service growing only marginally at 2%, the company does not have capacity to sustain its business. In addition, looming debt means it cannot borrow.

Takaendesa suggested the company could take a page out of data-only network provider Rain’s book by shrinking its business to become a niche player in the market instead of trying to compete with the big mobile operators. Blue Label said after markets closed on Wednesday that it has agreed to sell 85% of its stake in subsidiary Blue Label Mobile for R450m to DNI, a sim-card distributor that is partly owned by Net1, which holds a 15% stake in Cell C.

The proceeds will be used to pay down debt.

In addition, Blue Label said that TPC has agreed to sell its interest in cellphones and tablets distributor 3G Mobile for R544m to DNI.