Why Blue Label is still committed to struggling Cell C
It believes Cell C still has a fighting chance.
South Africa’s third-largest mobile phone company Cell C has been a perennial underperformer since its launch in 2001. A highly competitive telecommunications industry in South Africa and underinvestment in its network infrastructure meant that Cell C has lost market share to its larger competitor MTN and Vodacom. Cell C is also loss-making.
Cell C unveiled a net loss after tax of more than R8-billion for the year ended 31 May 2019, compared to a loss of R656-million for the previous comparable period. The company’s total liabilities (R23.2-billion) now exceed the value of its assets (R18.4-billion), rendering it technically insolvent.
Blue Label Telecoms, a South Africa-based distributor of prepaid airtime, starter packs, data and electricity tokens, owns 45 percent of Cell C – a stake it bought for R5.5-billion in 2017. Today, Blue Label has written down the value of Cell C to zero.
Cell C requires capital in the form of a recapitalisation. The company might receive a cash injection from the Buffet Consortium, led by reclusive billionaire Jonathan Beare. The consortium has agreed to take a minority stake in Cell C that will shore up its balance sheet and pay down debt.
Despite this, Blue Label Co-CEO Brett Levy said the company is still committed to Cell C and is on track to implement a complex turnaround plan. The plan involves a recapitalisation and an impending new roaming agreement with MTN South Africa, which are set to put it on a path to profitability. Cell C CEO Douglas Craigie Stevenson (pictured) also gave his view about the future of Cell C.
M&A Africa: Cell C is in a difficult position. Why is Blue Label still committed to Cell C?
Brett Levy: Our commitment to Cell C is absolute. We are fully confident that Cell C will be a sustainable company. In the next recapitalisation over the next 12 months, Cell C will be a good company. The recapitalisation will change for us and there will be a much stronger Cell C after that.
M&A Africa: After the recapitalisation of Cell C through the Buffett Consortium, will Blue Label still be a 45 percent shareholder or sell down its stake?
Brett: This is a question I cannot answer. I am not sure where that leaves Blue Label as a percent. But we will be there [as a shareholder]. As we go through the recapitalisation and consider different restructuring models, it won’t change our commitment and involvement to Cell C.
M&A Africa: What is your diagnosis of where Cell C went wrong since 2001?
Douglas Craigie Stevenson (Cell C CEO): The company has not focused on performance and performance management. A performance culture is important for a business like this. We have a huge level of transactions going on and we should have good performance management. We have struggled over the past 19 years in terms of capital, with R24 billion in losses recorded. We need to complete the extension of the roaming agreement with MTN.
There were bad transactions that were made. And we have to make good decisions in the fast-changing telecommunications environment.
M&A Africa: What are the market-specific challenges that have impacted Cell C?
Douglas: The South African market is saturated. We are not getting a huge amount of organic growth in subscriber numbers but are getting growth from the migration of customers between networks due to the product offering. This doesn’t translate into positive cash flow for Cell C.
M&A Africa: What are the good features of Cell C and what is working in the business?
Douglas: We have positive assets in the business, particularly the spectrum. We have one of the nicest spectrum allocations and our customer base of 16 million is still strong.
Cell C is not stagnating because we are generating service revenue [for the year ended May 2019, Cell C’s revenue grew by a paltry 1 percent to R15.4-billion] and continue to expand on it. We are getting the business in the right place. The business is now taken seriously by the management team for a change. We are getting rid of costs and are understanding performance culture.
M&A Africa: What will be the biggest drivers for the transformation of Cell C?
Douglas: More spectrum allocation will be a game-changer for Cell C. With the recapitalisation, we can leverage growth. The roaming agreement is big for us. One of the big things about the agreement is that we previously had 6,500 roaming sites and the agreement (with MTN) puts us on par with other networks, giving us 13,000 sites. Cell C went to a 4G network offering, which allowed it to compete with the biggest mobile providers.
M&A Africa: Are there early indications that the turnaround strategy is starting to be positive for Cell C from an earnings perspective?
Douglas: The first quarter of 2019 has already given us an earnings before expenses, taxes, depreciation, and amortisation (Ebitda) of about R1 billion. I expect service revenue growth to continue in the fourth quarter. We want to be somewhat conservative. The last quarter and two months prior to that has shown us positive momentum.