How Blue Label has evolved

Though still primarily seen as an airtime distributor, the company has been building a broader distribution empire

This year marks 10 years since Blue Label Telecoms listed on the JSE.

Best known for distributing cellphone airtime used for voice and data services, Blue Label has evolved over the years and built a strong distribution empire that has become crucial to SA’S mobile network industry. It has also expanded into India and Mexico, and bought and launched a slew of companies, products and services that complement its core business.

Joint CEO Mark Levy says that though the company’s decade on the JSE has been challenging, especially on the regulatory front, the benefits that have come with it have far outweighed the negatives.

There is not a single moment that has been “more special than the others”, he says.

“Microsoft buying into the company and exiting was a big moment. Launching our business in Mexico was a big moment. Now buying into Cell C is also a big moment.”

Listing has, among other things, given the group more credibility, opened doors for capital raising and boosted its expansion outside SA.

Even so, it seems the market has not fully grasped what Blue Label does.

“Blue Label is not a complicated business. In reality we move any product that can be digitised,” says Levy. The group has built a virtual railroad to deliver products digitally, he says. These include prepaid electricity vouchers, location-based services, and tickets for events and transport, as well as financial services.

Though the company makes more money from airtime distribution, it also does a lot of business-to-business work, meaning it builds hardware and software solutions for retailers and the financial sector to move their services.

“We have been described as a telco, but we are not. Our core business is in distribution and financial services. We probably fall between the cracks,” says Levy.

Matthew Auerbach of Capricorn Fund Managers acknowledges that the market doesn’t understand Blue Label and sees it as an airtime distributor, whereas the business has changed — and will still change — substantially.

The group is buying a 45% stake in Cell C for R5.5bn and 100% of smartphone distributor 3G Mobile for R1.9bn.

“These are game-changing acquisitions done at good prices and will be earnings enhancing,” says Auerbach. “We don’t see Blue Label as a fully fledged telco, but rather as integrated into the operations of all telcos, where there is a symbiotic relationship between Blue Label and the telcos.”

The market has been sceptical of the Cell C deal because that company has struggled with profitability. However, now that it will have reduced debt, that will change. There is also an element of deal fatigue, as the negotiations seem to have carried on forever.

Levy says Blue Label makes money from volume transactions. “We do R400m transactions a month. We make little money per transaction. [It comes] from volume, so we have to do lots of transactions to make money.”

SA is the golden goose when it comes to demand for airtime. “It pays for everything. Other products ride for free. Our [gross profit] margins are increasing because airtime has paid for the cost of distributing other services,” says Levy.

The group’s Indian and Mexico businesses have yet to record profits, but there are signs that Mexico might turn the corner soon.

The proposed acquisition of 3G Mobile is set to give Blue Label entry into seven countries elsewhere in Africa, with an opportunity to expand some of its services there and in India and Mexico.

Blue Label’s share price listed at R9 in November 2007. The stock has since risen 74% to trade at R15. And Auerbach says it could easily go north of R20 in the next year, once investors understand the Cell C and 3G Mobile deals.

“We expect Cell C to list in the next couple of years, which could be a catalyst for further price appreciation,” he says.

Falcon Crest Asset

Managers CEO & chief investment officer Farai

Mapfinya says the general view about Blue Label is mixed. People either like it or they don’t, and brokers are evenly divided between giving it a buy rating and a sell rating.

Mapfinya believes there is an investment case but says the valuation determines whether it’s priced appropriately. “Despite the material pullback, we think it is still on the expensive side given its returns characteristics and business model. [It offers] a very low return on equity with exceptionally thin margins and we would require significantly higher upside potential to buy the share at current levels,” he says.

Though the latest acquisitions change the business mix in terms of segmental exposure, “we are not sure this will make the valuation more attractive or at par with the other telcos, Vodacom, MTN and Telkom. We don’t see that as likely in short to medium term”, he says.

We don’t see Blue Label as a fully fledged telco, but rather as integrated into the operations of all telcos, where there is a symbiotic relationship between Blue Label and the telcos Matthew Auerbach