Telkom ‘crazy’ to bet on Cell C?
On paper, a deal makes sense, as Telkom again tries to buy Cell C.
Telkom would still have to assume Cell C’s debt
On paper, at least, a Telkom/Cell C deal makes sense. Telkom would use its far superior balance sheet to buy a weaker rival, giving its mobile business instant scale. It tried to buy its (then larger) rival in 2017.
With 27 million subscribers, a combined operator will be better able to compete with MTN (28.9 million) and Vodacom (43.9 million).
But the problem is that Cell C is in worse shape today than it was two years ago when Telkom tried.
Any deal for Cell C must resolve its R9 billion debt, which is R1.5 billion larger than last May.
Blue Label Telecoms paid R5.5 billion for 45% and it doesn’t seem likely that a deal for Cell C will value the operator at anything more than R10 billion, given the deterioration of its balance sheet and income statement since the recapitalisation.
Telkom group CEO Sipho Maseko may have some sort of ace up his sleeve.
Cell C has accumulated tax losses in excess of R20 billion. Could this be central to a deal?
It is obvious that costs can be removed from Cell C. In fact, one could envision a scenario where customers are migrated to Telkom’s network and practically everything else is shut down.
The two most valuable items to Telkom in this equation are Cell C’s subscriber base and the licensed spectrum.
Now that Telkom’s Mobile business is profitable, it needs to continue investing in capital expenditure to accommodate growth in subscribers.
Other expense increases in the business will be in line with revenues. One way of looking at this is to calculate the amount of investment that is required in Telkom’s network to sustain growth in subscribers, and then to add to this the cost of acquiring customers via sales, marketing or incentives (and other overheads).
At a hypothetical R10 billion, the cost per customer acquired from Cell C would be about R650.
But the debt needs to be factored in.
Also, Cell C says its total assets are valued at R18 billion (with R12 billion of this ascribed to its network).
On paper, there are many ways to make the deal seem appealing.
Assuming a hypothetical price of R10 billion plus the debt, one might argue that, given the assets, the subscriber base could be “bought” for R1 billion.
But Telkom would still have to assume Cell C’s debt, as a debt-for-equity swap seems farfetched.
Telkom could look to issue shares to raise capital, but neither this nor a debt for equity swap is likely to find favour with Telkom’s largest shareholders – government, directly via the Department of Communications (40.5%), and the Government Employees Pension Fund via the PIC (11.9%).
Telkom also has some serious issues to resolve in its own business. Until now, mobile has made up for the declines elsewhere but, worryingly, growth in mobile subscribers has slowed sharply in the last six months. BCX is going nowhere and fibre is not making up the losses elsewhere in its fixed line unit, nor is it large enough yet to move the needle. This has possibly forced Telkom’s hand.