Cell C recaps in 2017 versus 2022 – spot the difference

When Cell C CEO Douglas Craigie Stevenson unveiled Cell C’s latest results on 29 September, he was upbeat about their prospects following the long-awaited recapitalisation deal.

With a reduced debt burden, streamlined company, and new network strategy, Craigie Stevenson told investors that Cell C is on a path of sustainability and growth.

Talk of transforming into a techo, a virtualised network strategy to reduce capital expenditure, operational efficiencies, and product rationalisation dazzled many journalists and analysts.

However, a few people who have covered the telecommunications industry for a while were not equally impressed. The reason was that they had heard it before.

When Cell C concluded the first recapitalisation deal in 2017, former CEO Jose dos Santos told investors they worked for four years to get the mobile operator back on track from a challenging financial situation.

He said they improved staff morale, gained South African consumers’ confidence, and increased revenue.

Through the recapitalisation in 2017, Cell C reduced its net debt to R6 billion, which included $184 million of bonds fully hedged into rand.

Dos Santos said the recapitalisation provided Cell C with a sustainable capital structure to improve financial returns. “The recapitalisation puts us in a great position moving forward,” he said.

Cell C had a clear strategy to create a strong third mobile operator in South Africa, which offered a range of digital products.

It was not long before the cracks started to show.

The strategy did not work, and within two years, Cell C looked at another recapitalisation process to alleviate its debt and save the company.

After three years, a new recapitalisation deal was unveiled, which included Cell C lenders agreeing to take 20c on the rand.

Craigie Stevenson worked hard to convince investors that the latest recapitalisation was different from the previous one.

He said they had dealt decisively with the debt, had a different business model, and optimised the company.

You will be excused if you feel you just experienced déjà vu. It is, indeed, similar to what Dos Santos told investors in 2017.

2017 versus 2022 recap balance sheets

Daily Investor compared the operator’s post-recap balance sheets from 2017 and 2022 to see whether Cell C’s latest recapitalisation was different from five years ago.

During the 2017 recapitalisation, Cell C reduced its loans and borrowings from R17.7 billion to R6.8 billion. Cell C also increased its assets from R15.7 billion to R18.9 billion.

The significant debt reduction helped Cell C to show positive net equity of R3.8 billion.

The situation looks less rosy this time around. Cell C reduced its total liabilities from R23.7 billion to R12.4 billion, but its assets declined from R8.8 billion to R6.2 billion.

Post recap, the mobile operator is still in a negative equity position, which was not the case in 2017.

Cell C said its negative equity position results from historical cumulative losses, which, post recap, are expected to decrease over time while the company is in recovery.

It added that time, the successful implementation of the recovery strategy, and eliminating once-off costs will turn the situation around.

Cell C predicted that the company would return to sustainable profitability and convert the retained loss to retained profits.

It raises the question of how much debt Cell C has following the recapitalisation. It is not an easy question to answer.

Cell C CFO Lerato Pule said they have a debt facility of R1.4 billion with an interest charge of R2.6 billion.

It must make a R2.2 billion payment after 42 months and R1.8 billion after 66 months to service this debt.

It also has other financial obligations, including making two bullet payments to its head-office landlord, Attacq, in 2024 and 2026 for outstanding rent.

Cell C would not say how much it owes Attacq, citing confidentiality agreements.

Cell C’s financial statements show it has interest-bearing loans and borrowings of R2.4 billion made up substantially of renegotiated debt – from R2.4 billion short term to R2.3 billion long term.

A breakdown of the renegotiated balances following the recapitalisation is provided below.

• CEC – R1.3 billion (renegotiated payment terms – reclassified from short term to long term).

• Net1 – R270 million (renegotiated payment terms – reclassified from short term to long term).

• ZTE – R110 million (reduced balance, also renegotiated payment terms to extend it from current to long term).

• MTN – R582 million (renegotiated payment terms – reclassified from short term to long term).

• Blue Label Telecoms – R47 million (reduced balance, also renegotiated payment terms to extend it from current to long term).

The latest recapitalisation is partly financed by its main shareholder, Blue Label Telecoms.

Through The Prepaid Company (TPC), Blue Label lent Cell C R1.03 billion to pay the “20c to the rand” claims from secured lenders.

TPC will also purchase R2.4 billion in prepaid airtime from Cell C to assist the operator with working capital.

It is unclear how the loan, airtime purchases, and other deals with Blue Label will impact Cell C’s finances.

A question was raised about whether the majority of Cell C’s profits will accrue to Blue Label, but the company preferred not to go into details on this point.

The table below compares Cell C’s balance sheet and operational data following the two recaps.

Balance sheet	Post 2017 Recap (billion)	Post 2022 Recap (billion)
Total assets	R18 948	R6 204
Total liabilities	R15 187	R12 412
Net equity	R3 760	-R6 208
Operational data	Dec 2017	Dec 2021
Revenue	R15 715	R13 381
EBITDA	R7 793	R2 583
Operating expenditure	R4 877	R10 798
Normalised net profit/loss	-R26	-R396
Active subscribers	16.3	12.8