Telkom eyes Cell C takeover, say sources

Sunday Times - - Business Times - By NICK HEDLEY

● Telkom is eye­ing a full takeover of Cell C as part of its plans to cre­ate a more for­mi­da­ble chal­lenger to net­work gi­ants Vo­da­com and MTN and their near du­op­oly over SA’s mo­bile telecom­mu­ni­ca­tions.

The par­tially state-owned op­er­a­tor wants 100% of Cell C and is an­gling for a cash­less merger, peo­ple fa­mil­iar with the pre­lim­i­nary talks told Busi­ness Times this week.

Telkom’s pref­er­ence is to fund the deal by is­su­ing shares to Cell C’s own­ers, in­clud­ing Blue La­bel Tele­coms and Net1, the peo­ple said. The par­ties would need to agree on a merger ra­tio, or val­u­a­tion for Cell C, be­fore talks can progress.

In Au­gust last year, Blue La­bel bought 45% of Cell C and Net1 took on a 15% stake as part of the op­er­a­tor’s re­cap­i­tal­i­sa­tion deal. Telkom was keen on a Cell C takeover but was beaten to the punch. Ear­lier this year, the 41% state-owned net­work op­er­a­tor flirted with MTN, but those talks fiz­zled out.

At the time of its re­cap­i­tal­i­sa­tion, Cell C’s debts were re­duced by more than R30bn, though an­a­lysts are still wary about the op­er­a­tor’s fi­nan­cial po­si­tion as it is pro­jected to end 2019 with about R9bn in net debt.

Do­ing a share swap, rather than pay­ing up­front for Cell C, would free up cash for cap­i­tal ex­pen­di­ture, the sources said. The com­bined en­ti­ties would have a stronger con­sumer busi­ness — with 22.8-mil­lion mo­bile sub­scribers be­tween them — and would be able to compete for en­ter­prise con­tracts.

Cell C’s cur­rent share­hold­ers would ef­fec­tively be paid back as Telkom’s share price rose. Im­por­tantly, said the sources, Telkom would be able to re­duce Cell C’s hefty in­ter­est bill. In the six months to end June, Cell C’s net fi­nance costs were R1.6bn, drag­ging it to a pre-tax loss of R645m.

Strip­ping out in­ter­est costs, taxes, de­pre­ci­a­tion and amor­ti­sa­tion, Cell C gen­er­ated earn­ings of R2.4bn in the in­terim pe­riod.

Blue La­bel man­age­ment said pre­vi­ously that the com­pany ex­pects Cell C to be­come prof­itable by the end of next year. From that time, it plans to ei­ther list the op­er­a­tor or bring in a strate­gic in­vestor.

Lester Davids, a trading desk an­a­lyst at Unum Cap­i­tal, said the mer­its of the po­ten­tial deal de­pend on val­u­a­tions and the terms of the merger. “How­ever, a po­ten­tial tie-up could marginally re­duce the cap­i­tal ex­pen­di­ture re­quired to ex­pand its own net­work, as Cell C’s in­fra­struc­ture may be in­te­grated.”

Telkom and Blue La­bel de­clined to com­ment.

A tie-up could re­duce the ex­pen­di­ture re­quired to ex­pand its own net­work

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