Blue Label’s R4bn bid to help lighten Cell C debt
CELL C intends listing on the JSE within the next few years to unlock value for shareholders and staff. This comes in the wake of news this week that Blue Label Telecoms has tabled an offer to acquire a 35% stake in South Africa’s third mobile operator for R4-billion.
The proposed acquisition forms part of a significant restructuring at Cell C, which will result in the company’s debt being reduced by more than half and all employees being given a stake in the business.
Blue Label intends using a mix of cash and new debt to pay for the stake. Although the R4billion injection implies a valuation of Cell C of just R11.4billion — far less than the R22billion parent Oger Telecom was reportedly seeking from Telkom — a spokesman for the operator said the figure represented Blue Label’s share of the equity value in Cell C and did not include the debt value. The restructuring plan has placed an enterprise value on the business of about R19-billion.
Controlling shareholder Oger Telecom has promised to inject fresh capital to the tune of many billions of rands, but reduce its stake from 75% to roughly 27%.
Black empowerment partner CellSAf will also see its stake diluted, from 25% to 9%. It is understood that CellSAf is not contributing any fresh capital under the restructuring plan.
Cell C’s crippling debt has long been a noose around the operator’s neck and is believed to have been a pivotal factor in a number of suitors, including Telkom and Sweden’s TeliaSonera, walking away after looking at the company’s books.
Cell C’s debt will be cut to between R6-billion and R8-bilnever lion after the proposed restructuring. All of the debt will be converted to rands — today, 90% of it is denominated in dollars and euros, so when the rand collapses, as it did this week, it places a greater burden on the company’s balance sheet.
Cell C CEO Jose Dos Santos, who will stay on in his position for at least the next five years as part of the restructuring agreement, said the company had defaulted on its debt repayments despite high debt levels.
The company’s prospects have improved markedly in recent years. Under the leadership of Dos Santos and predecessor Alan Knott-Craig, Cell C has grown its market share — measured by sim cards — from 9% to 22%, mainly by targeting the price-sensitive prepaid segment with aggressive tariff plans. The company is also operationally profitable.
Management hopes a plan to include staff in the restructuring will incentivise them and help the company make further inroads against its two main rivals, Vodacom and MTN. In terms of the restructuring, Cell C staff will acquire 30% of the company for R2.5-billion. The company will raise the money on behalf of employees by raising new debt — which will form part of the R6-billion to R8-billion debt target agreed to, with the loan to be paid back during dividend flows over a period of years.
Blue Label co-CEO Mark Levy said the plan to reduce Cell C’s debt to below R8-billion made it “an interesting business to be part of”. But analysts worry about the impact the deal could have on Blue Label’s relations with Vodacom and MTN.
Levy has played down these fears, saying “co-opetition” (competing while co-operating) was commonplace. Blue Label had “no intention of breaching the contracts” it had with the other operators “or breaking these relationships that we have developed for so many years”.
Irnest Kaplan of Kaplan Equity Analysts was not so sure. “The deal may look exciting, but the key question is whether it will negatively affect Blue Label’s relationship with Vodacom as a customer,” he said.
Other analysts said it would have made more sense for Cell C to be sold to Telkom. “The ideal match-up for Cell C was a deal with Telkom for many tangible reasons that would have benefited the country as a whole,” said BMI-TechKnowledge MD Denis Smit. “This deal is basically a refinancing proposal that will significantly improve Cell C’s balance sheet.”
But Smit said the fact that there would be significant investment by staff was “very noteworthy and it shows management’s faith in the enterprise. We think this will also assist Cell C to participate more [meaningfully] in future spectrum auctions based on the stronger balance sheet. This can only be good for the company.”
Dos Santos said binding offers would be submitted to the boards of both Cell C and its immediate parent, 3C Telecommunications, within the next 14 days.
He did not expect the deal to face regulatory hurdles and added the company would continue to meet black empowerment shareholder requirements after the transaction, despite the dilution of CellSAf’s stake.
In terms of the restructuring, Cell C staff will acquire 30% of the company