Blue Label’s Cell C stake proves to be highly costly
The decision of JSE-listed companies Blue Label Telecoms and Net1 to take large stakes in Cell C, SA’s third-largest mobile operator, seems to have been ill-fated from the start.
With its market capitalisation sitting at R2.51bn on Thursday, Blue Label is now worth about R3bn less than the R5.5bn it paid for its 45% interest in Cell C two years ago.
Blue Label said on Thursday that it had swung into a headline loss in the year to end-May, as it wrote down the value of its 45% holding in the debt-laden cellphone operator.
The company was expecting a headline loss per share of 310.49c-314.49c, a fall of 369%372% when compared with that of the prior matching period.
Blue Label is not the only casualty of Cell C’s ailing fortunes. Net1, which acquired its 15% stake in Cell C for R2bn in 2017, said it believed that the fair value of its interest in Cell C at the end of June is “nil”.
But Net 1, which also operates sim card distributor DNI, said Cell C’s long-term prospects would improve once it had been recapitalised. “The decisions of
Net1 and Blue Label to write down the value of their respective equity holdings do not impact Cell C’s operations, DNI’s distribution capabilities or the proposed transactions being pursued by it,” said Net1 CEO Herman Kotze.
Cell C’s trading losses and impairments had the largest effect on headline earnings for Blue Label, contributing 287.65c, or 71%, of the fall per share, the company said. While Cell C generated R15.7bn in revenue for the year to end-December 2018, it reported a loss of R1.27bn for the same period. Cell C’s financial statements, also show that by the end of 2018 it owed about R8.7bn to a number of lenders, including the Development Bank of Southern Africa.
Blue Label’s share price fell as much as 5.2% to R2.51 on Thursday, before paring losses to close 3.77% down at R2.75.
Peter Takaendesa, a portfolio manager at Mergence Investment Managers, said that despite the share price having fallen 50% over the past year the market is probably “encouraged by the good performance of the traditional Blue Label distribution operations”. Negotiations to derisk Cell C “are continuing”.
However, Takaendesa said: “Cell C remains a risk to Blue Label, and I think the sooner they reduce their exposure the better.”
The muted reaction of the share price was probably an indication that there “are no sellers left”, said David Shapiro of Sasfin Securities.
“Looking at the numbers, it just shows you what bad a position Cell C is in,” he said. Shapiro said that Cell C had been a bad bet to begin with. In August, S&P Global Ratings downgraded Cell C’s debt to D, or “default”, its lowest-possible junk rating. This came after the cellphone operator “failed to make interest payments on certain bilateral loan facilities”.
The ratings agency said at the time that it believed there would be an increased likelihood of Cell C being unable to repay all of or a substantial part of the obligations as they came due, unless it was able to restructure its debt and recapitalise its balance sheet.