Cell C’s finances analysed

Cell C will release its latest financial results next month, and investors will take a keen interest because of the impact on Blue Label Telecoms (Blue Label).

On 24 August 2020, Blue Label Telecoms informed shareholders that Cell C’s recapitalisation process had been delayed.

“It is anticipated that the recapitalisation process, the completion of which has endured for longer than initially anticipated, is expected to close by mid-September 2022,” it said.

The delay in concluding the Cell C recapitalisation transaction is nothing new. It has been dragging on for nearly four years, with numerous missed deadlines.

To understand why the recapitalisation transaction is so important, you need to look at Cell C’s dismal financial state.

Over the last nine years, Cell C has racked up losses of nearly R29 billion.

The mobile operator has been in a death spiral of declining revenue and growing debt, which caused it to start defaulting on its debt in January 2020.

It has been technically insolvent for years, and many industry experts doubted Cell C’s viability as a going concern.

Despite tremendous challenges, Blue Label maintained its belief that Cell C has great potential.

As such, Blue Label and Cell C developed a turnaround strategy and recapitalisation programme to save the operator.

The plan, unveiled in February 2020, included suspending debt payments, cutting costs across all operations, reducing staff, and removing non-profitable products from its portfolio.

Cell C also unveiled a revised network strategy to switch off its radio network and use roaming agreements with MTN and Vodacom to serve its customers.

To reduce Cell C’s debt, Blue Label agreed with secured lenders to take an 80% haircut.

To conclude the transaction, Blue Label, through The Prepaid Company (TPC), will lend 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.

Following these transactions, Blue Label will hold approximately 49.3% of the shares in Cell C.

Cell C finances

All eyes will be on Cell C on 14 September 2022 when it releases its financial results for the year ended 31 December 2021 and interim results for the six months ended 30 June 2022.

Blue Label’s latest results gave a sneak peek of what investors can expect, and it does not look great.

Since Blue Label acquired a 45% stake in 2017, Cell C’s revenue dropped from R15.7 billion to R13.3 billion.

Cell C’s has also swung from a R2.4 billion profit to a R2.4 billion loss over the last twelve months.

However, Blue Label co-CEO Brett Levy said the loss is not as bad as it seems as it was a result of once-off expenses, including:

  • R1.5 billion is accrued for interest to the old ICA (inter-creditor agreement).
  • R750 million Forex losses.
  • R1.3 billion in cost related directly to the recapitalisation transaction.

Levy said these expenses would be reversed through the recapitalisation transaction, which is expected to close next month.

Levy said the interest and Forex losses would be reversed as part of the recapitalisation transaction.

“When you take it out of the performance and add it all back, Cell C’s profits for the year is sitting around R1.5 billion to R2 billion,” Levy said.

However, it is unclear how Levy arrived at the R1.5 billion to R2 billion profit figure. Removing the above costs from Cell C’s loss of R2.4 billion only arrives at a R1.1 billion profit.

It is also unclear what costs at Cell C increased so significantly to cause the large swing in profit to loss.

Daily Investor asked Blue Label for clarity on these figures, but the company did not respond.

Capex and network expenses

Cell C’s revised network strategy – where it buys infrastructure services from MTN and Vodacom instead of running its own radio network – means it is saving on capital expenditure.

Cell C must still invest in its billing, core network, long haul transmission, and other platforms, but it is a fraction of what it takes to maintain a full mobile network.

Between 2018 and 2020, for example, the operator cuts its capital expenditure from R2.2 billion to R196 million.

However, there is a trade-off. Cell C’s network expenses – the cost it incurs from leasing capacity from other infrastructure providers – increased from R880 million in 2019 to R1.071 billion in 2020.

It should be noted that Cell C’s network expenses declined by 27% from the first six months in 2020 to the same period in 2021.

It is also not clear how much Cell C owes MTN for roaming on its network.

MTN said a balance of R254 million in national roaming revenue from Cell C remains unrecognised on 30 June 2022.

Cell C’s results on 14 September should provide clarity on these questions and others about the operator’s finances.