Cell C’s house of pain

Cell C has caused tremendous wealth destruction. Its lenders had to take an 80% haircut on the mobile operator’s debt, and its main shareholder, Blue Label Telecoms, lost billions in value.

Cell C launched its first cellular services in South Africa on 17 November 2001, promising to dazzle consumers with “new concepts that will change the shape of the cellphone business”.

Despite its enthusiastic start, Cell C struggled to compete against Vodacom and MTN, which had well-established networks and customer bases.

Over the next fifteen years, the company regularly changed leadership teams and strategies but failed to become financially sustainable.

The cost of building and maintaining a mobile network saddled Cell C with a mountain of debt, which ultimately caused it to face bankruptcy.

Cell C was saved by Blue Label Telecoms, which acquired a 45% stake in the mobile operator for R5.5 billion in August 2017.

Many analysts warned that getting involved with Cell C was dangerous, considering the South African telecommunications market is dominated by Vodacom and MTN.

However, Blue Label co-CEO Brett Levy dismissed the critics and was optimistic about a turnaround in Cell C’s financial and operational performance.

Levy said the critics did not understand what they were planning with Cell C, which included launching a video streaming service called Black.

The critics were right. Cell C’s finances continued deteriorating, and it had to shut down Black after pumping R1.5 billion into the platform.

Blue Label impaired its investment in Cell C to nil. This impairment was essentially admitting that the company made a mistake in investing in Cell C.

The Cell C debacle caused Blue Label’s share price to plummet from R21.00 to R3.51, destroying R16 billion in shareholder value.

However, Blue Label would not give up on Cell C and announced another recapitalisation programme to save the struggling mobile operator.

The recapitalisation included a R1.46 billion loan from Blue Label to Cell C, which was used to repay Cell C lenders. The lenders received only 20% of their claimed loans.

In September 2022, Blue Label informed shareholders that Cell C had implemented a turnaround strategy to improve operational efficiencies and reduce operational expenditure.

“The recapitalisation of Cell C will enhance the value of Blue Label’s shareholding and restore its shareholder value,” Blue Label said.

This value is yet to materialise. Cell C looms large in every Blue Label trading update since the implementation of the recapitalisation programme.

Yesterday, Blue Label Telecoms informed shareholders that its basic, headline, and core headline earnings per share for the year ended 31 May 2023 would decrease by more than 60%.

Once again, Cell C took the spotlight when Blue Label informed the market about its financial challenges. It included.

• Expected credit losses and fair value movements of R88 million.
• Loss on modification of a financial instrument of R57 million primarily due to the renegotiation and reclassification of the CEC deferral amount of R1.1 billion owed by Cell C.
• Finance costs of R322 million resulting from increased borrowings related to airtime sale and repurchase obligations, as well as the issue of Class A Preference shares.
• Finance income of R238 million from a loan to Cell C for its debt funding requirements.
• A partial reversal of R962.5 million relating to the initial impairment of R2.5 billion of Blue Label’s investment in Cell C as of 31 May 2019, in line with an improvement in its equity valuation.
• Recognition of the company’s share of Cell C’s net accumulated losses for the period from 1 June 2019 to 31 May 2023, limited to R1.329 billion, being the aggregate of the partial reversal of the initial impairment of R962.5 million of Blue Label’s investment in Cell C, as well as additional investments therein amounting to R366 million.

Many Blue Label shareholders, including the company’s co-CEOs, Mark and Brett Levy, would love to start reporting positive news about Cell C.

The mobile operator is under new management after former Vodacom executive Jorge Mendes took the reigns in the middle of the year.

Cell C also completed its network migration in June 2023 after signing roaming agreements with MTN and Vodacom.

This will significantly cut Cell C’s capital expenditure requirements and reduce its operational expenses.

Whether it will be enough to make Cell C a profitable company and a valuable asset to Blue Label remains to be seen.