Telkom: We won’t offer more for Cell C

Telkom, which was rebuffed in its attempt to bulk up its mobile phone business by buying out Cell C, has signalled that it will not be returning with a higher offer for the number three cellphone operator in SA.

“At this point, Telkom is not considering a revision of its offer to Cell C as we believe we made a fair offer,” the company said in a statement responding to questions from Business Day.

“Telkom Mobile continues to sustain its growth trajectory. The rejection of the offer by Cell C does not change this.”

Telkom, the share price of which was down 31% since it told investors on November 12 it was seeking to make an acquisition without naming the debtladen Cell C as its target, said on Friday the latter had rejected the proposed tie-up.

A deal would have created a provider with about 27.5-million subscribers, that would be serious competition for MTN and Vodacom, which have 70% of the mobile and data market.

Telkom, led by CEO Sipho Maseko, has been investing heavily to grow its mobile and fibre operations in an effort to move away from its traditional fixed-line business.

Peter Takaendesa, a portfolio manager at Mergence Investment Managers, said it is unlikely that Telkom would return with a higher offer for Cell C. It is “important to note that Telkom has walked away before and our understanding is that the high pricing expectation of Cell C shareholders was the main reason for the failure of previous talks”, he said.

Cell C confirmed that it had declined Telkom’s offer, saying it would consider all proposed deals that take the full value of the company into account.

Telkom, which has grown its own subscriber base 85% in the past financial year as it transforms to a major data services player, said it remains open to resuming talks with Cell C “on the same terms”. It had increased its subscribers to 11.5million by the end of September.

This is not the first time that the 40% government-owned Telkom has made a bid to buy Cell C. Its 2017 attempt was rejected in favour of a recapitalisation plan led by Blue Label.

That deal reduced Cell C’s debt by two-thirds to less than R6bn, but has been disastrous for Blue Label after Cell C’s debt ballooned towards R9bn as it

struggled to catch up with its bigger rivals.

Telkom has made it clear that if the price of Cell C is less attractive than bidding for new spectrum, radio frequencies that carry information and data, and the other costs of growing organically, it would rather keep to its current growth model, said Takaendesa. He predicts that

Telkom could overtake Cell C as a mobile player over the next 1218 months.

The key issue for Telkom, he said, is to generate enough cash in the mobile business to fund its growth.

In morning trade on Friday, Telkom jumped 4.65% to R47.23. It closed 3.9% higher at R46.89, valuing the company at

R23.97bn. Friday’s share price reaction may have been an indication that some investors were concerned that Telkom will be forced to pay too much for Cell C and add to its R11.8bn debt in order to clinch the deal, said Lester Davids, an analyst at Unum Capital.

Telkom is not the only player trying to inject much needed capital into Cell C. The Buffet consortium, led by reclusive billionaire Jonathan Beare, agreed to take a minority stake in Cell C to bolster the mobile operator’s balance sheet, but the deal, first proposed in February, has not yet been finalised.

Cell C said constructive discussions on the recapitalisation were under way and “we will update the market in due course regarding progress made to successfully restructure the business”.

Blue Label Telecoms’s stock closed the week up 3.85% on Friday to R3.24. It is valued at R2.96bn, about half of the R5.5bn it poured into Cell C two years ago.