Can Cell C be salvaged?
BAD DECISIONS: COMPANY DROWNS IN DEBT
Pending financial reports to indicate if recapitalisation will proceed.
It’s mid-September, and Blue Label and Net1 are unable to publish annual financial results. Both are waiting for Cell C to conclude its reporting process so they can ascertain the valuation of their joint asset. In 2017, Blue Label led a consortium, including Net1, to buy Cell C. It was envisioned that Cell C would list on the JSE by 2020, through which Blue Label would earn a return on its investment and a liquidity injection. The transaction was R5.5 billion for effectively a 45% stake. But the value destruction is obvious: Blue Label’s share price has depreciated by well over 90% in the last two years and continues to decline.
Dashed hopes
Cell C launched its mobile network business in November 2001. A key operating challenge was to have national coverage, which still eludes it.
By 2017, hopes that Cell C would break the Vodacom/MTN duopoly had faded. It was saddled with approximately R19 billion of debt. Cell C’s market share is estimated at 13% instead of the envisioned 20%.
The company challenges:
CellSaf: When Cell C launched, 40% was held by black economic empowerment entity CellSaf. Since 2015, Cell C has been in litigation battles with it, mainly due to the lack of value creation in CellSaf.
MTN agreement: Last year Cell C and faces very real MTN entered into a roaming agreement to allow Cell C to piggyback on MTN’s network. But last month, MTN noted Cell C didn’t make payments on its service agreement and the total unpaid bill was R393 million. MTN wrote off about R211 million. It said it would evaluate the sustainability of the agreement. Cell C and Blue Label said they were working to address concerns raised.
Credit rating: In August, S&P Global Ratings downgraded Cell C to default status. In July, Cell C failed to make interest payments worth R194 million on certain bilateral loan facilities. Bloomberg quoted Cell C as saying it was in talks with lenders to work on its debt profile, and plans to complete business recapitalisation by the end of 2019.
Corporate governance: In July, Cell C said it had appointed Bowmans to investigate suspected irregular business practices.
Black streaming: In August, Cell C announced it would review channel options for its streaming service Black, launched last year. Based on 2018 financial figures, Cell C spent close to R524 million acquiring programming and movie rights; 2.5 million people browsed the catalogue; and 260 000 accessed Black via free trials. It’s challenging to determine whether the investment has yielded a return.
Competitive landscape: Vodacom, MTN and Telkom’s full-year reporting shows SA’s mobile market has hit maturity. Growth and survival through the fourth industrial revolution depends largely on the ability to invest in capital infrastructure and drive innovation.
In February, Cell C signed a binding term sheet with Buffet Investments. Buffet would acquire a minority investment and the funding would be used to recapitalise the business.
Cell C’s financial statements are eagerly awaited, to see whether its recapitalisation will proceed.