Why investors dumped Blue Label

Blue Label Telecoms’ share price plummeted 84% over the last seven years as investors lost trust in the company and its management.

Blue Label’s share price decline started shortly after its fateful decision to buy 45% of Cell C for R5.5 billion on 2 August 2017.

Vestact CEO Paul Theron warned as far back as 2013 that Cell C faced severe financial problems and that the mobile operator was on the verge of bankruptcy.

Theron said Blue Label’s management team were idiots for getting mixed up with Cell C, comparing it to “grabbing an anchor and jumping off a pier”.

Blue Label co-CEOs Mark and Brett Levy dismissed these warnings, saying the market did not understand what they were planning with Cell C.

When the share price started to plummet, Brett Levy criticised investors, saying they did not appreciate Cell C’s compelling growth prospects.

Levy said they had a clear strategy for Cell C and that it is a “growth story” that will make the operator a very strong number-3 player.

The strategy included a big content play through the video-streaming service Black, which was supposed to be Netflix for South Africans.

Things did not work out as planned. Cell C suffered a loss of R1.27 billion in the 2018/2019 financial year, its debt increased, and Black failed spectacularly.

Blue Label’s optimism about Cell C vanished along with its market cap. On 31 May 2019, Blue Label impaired its investment in Cell C to nil.

This was not the end of Blue Label’s Cell C headache. It could not let the mobile operator die as it remains one of its main revenue and profit drivers.

Brett Levy told MyBroadband in August 2020 that Cell C made up around 25% of Blue Label’s total profits.

It is, therefore, in Blue Label’s interest to keep Cell C alive and make the mobile operator sustainable.

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

Part of the turnaround included recapitalising Cell C, which included a R1.46 billion loan to Cell C, used to repay the mobile operators’ lenders. The lenders received only 20% of their claimed loans.

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

Despite the recapitalisation, Blue Label Telecoms’ latest financial results revealed that the mobile operator remains technically insolvent.

Cell C’s total liabilities of R19 billion far exceed its total assets of R15 billion. This leaves the company with negative equity of R4 billion.

Simply put, it shows Cell C cannot honour its current liabilities, including its short-term borrowings, with its assets.

For Cell C to dig itself out of this hole, it must generate significant profits to reduce debt and increase assets.

However, its latest results showed that Cell C’s revenue continued to decline – from R13.3 billion in the 2022 financial year to R11.9 billion in the 2023 financial year.

New Cell C CEO Jorge Mendes said they are currently working on their new strategy, which would require a minimum of 15% revenue market share in South Africa to become sustainable.

“We would be profitable before reaching 15% market share, but that would be a solid position to be in,” he said.

This means Cell C would have to increase revenue to at least R26 billion, which is more than double what it currently makes.

Even before thinking about this lofty goal, Mendes will have to stem the revenue decline that Cell C experienced over the last few years.

In 2017, Cell C generated R15.7 billion in revenue. It has steadily declined over the last six years, and the company’s revenue has now hit its lowest level since 2015.

While Cell C triggered the decline in Blue Label’s share price, other problems at the company have compounded the break of trust among investors.

Last year, Blue Label uncovered a large fraudulent scheme, operating since 2015, perpetrated by two former senior executives of a subsidiary company.

The fraudulent transactions were performed primarily outside the course and scope of the subsidiary’s field of commercial dealings.

Another problem is the complexity of Blue Label’s reporting, making it nearly impossible for investors to understand what is really happening at the company.

Several special-purpose vehicles (SPVs) and related party transactions created a financial web that not even the smartest analysts can untangle.

Popular market commentator, The Finance Ghost, said the group’s numbers are so confusing that most people just don’t bother.

“This is despite some trusted voices on Twitter shouting to Blue Label from the rooftops and hoping that someone will listen,” he said.

Commenting on a recent earnings trading statement, he said the announcement makes no sense whatsoever.

“On an adjusted, adjusted, very-adjusted, please-look-away-from-this-section basis, it’s possibly gone up. But I’m not sure. Nobody is,” he said.

Another example is the new special-purpose vehicle, SPV5, which Blue Label created to transfer debt of R275 million, which Cell C owes to Dark Fibre Africa (DFA).

During the 2023 financial year, Cell C’s debt owed to DFA was transferred into SPV5 in exchange for a 10% shareholding in Cell C.

The special-purpose vehicle, SPV5, is required to repay the debt of R275 million in tranches from 31 December 2024 to 31 December 2026.

Blue Label-owned TPC agreed to provide SPV5 with the necessary funding to pay R275 million to DFA. In return, it received a claim of R699 million in SPV5.

If SPV5 disposes of its shares in Cell C, R275 million of the net proceeds must be used to settle the lessor, and R100 million is to be paid to TPC.

This is all very confusing, especially since Blue Label Telecoms owns TPC and seems to be in control of SPV5.

Daily Investor asked Blue Label for clarity on SPV5, including where the 10% Cell C shareholding came from. It did not answer our questions.

Sasfin Securities’ David Shapiro told Business Day that the Blue Label results are very difficult to understand.

“The structure of the loans is difficult to understand. To get the large amount of cash for Cell C, they had to do all kinds of financial engineering,” he said.

“I don’t mean that in a negative way. But for any person to grasp is very difficult.”

Shapiro said when you look at Cell C, it’s scary. “They have gone through another recapitalisation process, but there is no guarantee the company will do better.”

“Blue Label Telecoms seems to be putting more and more money into it. I worry about that. Mobile operators are not an easy place to make money.”

Shapiro said competing against telecommunications giants like Vodacom and MTN is very hard. “You operate at their behest,” he said.

Wayne McCurrie from FNB Wealth & Investments said Telkom and Cell C have been in a difficult financial position since they started their mobile operations.

“You must have very deep pockets to be competitive and build a national network to deliver services,” he said.

If you cannot afford to build a network, which is the case with Cell C, you have to roam on Vodacom and MTN, which take your margin.

“You actually can’t win in this game, and I don’t think anyone wants to buy Cell C,” McCurrie said.