Cell C finances worry investors – here’s why

Cell C continues to weigh on Blue Label Telecoms, with its share price plummeting by over 80% since it decided to buy a large stake in the mobile operator six years ago.

Since Blue Label acquired a 45% stake in the mobile operator for R5.5 billion in August 2017, Cell C has been an albatross around the company’s neck.

Blue Label initially dismissed critics who questioned their decision, saying they did not understand what they were planning with Cell C.

However, Cell C’s financial situation continued to deteriorate, and two years later, Blue Label impaired its Cell C investment to nil, which has since been partially reversed.

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, this was not the end. Cell C is one of the main revenue and profit drivers for Blue Label through airtime sales and other products.

As such, Blue Label 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.

Since the new Cell C recapitalisation programme, Blue Label’s share price has declined by over 50%, which shows that the market is not convinced it will be different this time around.

Despite Cell C’s negative impact on Blue Label, it is doubling down on its investment and wants to take full control of Cell C.

Cell C co-CEO Brett Levy recently said they agreed to acquire control of Cell C and make it a subsidiary of Blue Label Telecoms.

Concerns around Cell C

Daily Investor approached three independent analysts and fund managers to gain more insight into their concerns regarding Cell C.

They said there are many reasons why they have lost trust in Blue Label as a sound investment, including:

  • A lack of reliable, up-to-date financial and operational data about Cell C.
  • Questions around Cell C’s long-term sustainability and ability to compete against Vodacom and MTN.
  • Blue Label Telecoms’ complicated and hard-to-understand financial reporting.
  • Many special-purpose vehicles and related party transactions are of concern.
  • Cell C’s performance fell short of expectations and was well below management’s guidance following the recapitalisation.

The sections below delve into a few of these issues in more depth. It includes the views of analysts and fund managers, who discussed Blue Label and Cell C with Daily Investor on condition of anonymity.

The elephant in the room

During the company’s annual results presentation, one analyst pointed out that Cell C was the elephant in the room.

Blue Label Telecoms shared very little financial and operational information about Cell C in its latest financial report, and investors were hungry to learn more.

However, when the questions about Cell C came in during Blue Label’s annual results presentation, Brett Levy cut it short.

“We are not going to get bogged down in numbers on Cell C because it deserves more airtime and more time,” Brett Levy said.

“Therefore, can we use any of these Cell C questions to take it offline for a direct one-on-one meeting or group meeting with Cell C and its team.”

However, not answering in-depth questions or sharing financial data about Cell C during an investor presentation where the Cell C CEO was present is curious.

Two analysts told Daily Investor the lack of reliable, up-to-date information on Cell C concerns them.

Over the last few years, the financial and operational data Cell C provided to the market was confusing and unreliable.

Cell C’s full-year balance sheet for its 2020 and 2021 financial years is a good example of poor reporting.

Its total liabilities and “net equity” numbers for the 2020 financial year make no sense. It raises concerns that such blunt errors would pass all checks and balances at such a large company.

Another concern is the discrepancy between Cell C’s balance sheets provided by Blue Label and the mobile operator itself.

Cell C presented its own balance sheet to investors over the last eight years, which differed hugely from Blue Label’s version.

In September 2022, for example, Cell C reported total assets of R6.2 billion, total liabilities of R12.4 billion, and negative equity of R6.2 billion.

Eight months later, Blue Label reported that Cell C had total assets of R15.0 billion, total liabilities of R19.1 billion, and negative equity of R4.1 billion.

Since Blue Label started to report on Cell C, its numbers did not reflect what the mobile operator presented.

Cell C told Daily Investor the discrepancy is due to the audit adjustments following the finalisation of the 2018 to 2022 audits, which were completed in Q3 2023 ahead of the Blue Label results release.

“Numbers presented last year in May 2022, September 2022, and August 2022 were unaudited,” Cell C said.

However, that does not fully explain the difference that persisted for as long as Blue Label has reported on Cell C.

The tables below show the difference in Cell C’s balance sheet as reported by Cell C and Blue Label.

What Cell C reported (R million)

DateTotal assetsTotal liabilitiesEquity
31-Dec-198 86916 717-7 848
31-Dec-207 79821 258-13 460
31-Dec-2110 72024 456-13 736
30-Sep-226 20412 412-6 208

What Blue Label reported (R million)

DateTotal assetsTotal liabilitiesEquity
31-May-2015 64123 654-8 013
31-May-2119 79525 354-5 559
31-May-2218 13926 146-8 008
31-May-2315 01519 062-4 047

Missed targets

After the recapitalisation of Cell C in September 2022, the mobile operator reduced its interest-bearing net debt to EBITDA ratio to 1.2 times.

Cell C signed a virtual RAN deal with MTN to limit capital network investments, cut its interest expense by reducing debt, and signed a promising MVNO deal with Capitec.

These developments boded well for Cell C, which told investors it was well-positioned to grow revenue in the prepaid market.

With lower expenses because of staff cuts and its virtual network agreement – and expected higher revenue in the prepaid market – Cell C was bullish on its prospects.

Cell C said it could rapidly grow EBITDA and free cash flow during an investor roadshow.

With R28 billion of unrecognised tax shields, Cell C saw itself printing money over the next five years. However, it is off to a rocky start.

Cell C’s latest results, which were shared as part of Blue Label’s annual financial statements, showed that Cell C’s revenue declined from R13.3 billion to R11.9 billion.

The reports showed that it swung from a R2.4 billion loss to a R4.9 billion profit, but it was the result of extraneous income.

Cell C’s net profit after taxation of R4.63 billion included extraneous income of R6.90 billion related to the effects of the recapitalisation transaction.

The extraneous income predominantly related to the release of debt where secured lenders accepted 20c to the rand as part of the recapitalisation.

When the extraneous income is excluded, Cell C recorded a loss of R2.30 billion for the year ended 31 May 2023.

This is a far cry from what Cell C told investors a year ago, and they want to know why the performance did not live up to expectations.

One analyst said the market needs to see Cell C’s full results and hear from the management on how they plan to reverse the losses.

There are concerns that the latest recapitalisation only helped Cell C survive instead of making it a growing and sustainable entity, as its guidance suggested.

Blue Label’s share of Cell C’s losses amounted to R1.27 billion. This is higher than Blue Label’s core business profit after tax.

The company’s report states that Blue Label has a 49.53% shareholding in Cell C, with a “total economic interest” of 63.19%.

Brett Levy recently said they agreed to acquire control of Cell C and make it a subsidiary of Blue Label Telecoms.

If Cell C’s results were consolidated into Blue Label’s for the 2023 financial year, the latter would have been loss-making without the non-operational Cell C debt forgiveness.

However, it should be noted that Cell C’s R2.30 billion loss may be overstated because of costs related to the recapitalisation transaction.

The table below shows Cell C’s annual performance figures based on Blue Label’s annual financial statements.

DateRevenueOperating profitNet profit after taxation 
31 May 2019R15.4 billionR1.7 billion-R8.0 billion
31 May 2019R14.6 billionNot Reported-R10.7 billion
31 May 2020R14.0 billionNot Reported+R2.5 billion
31 May 2021R13.3 billionNot Reported-R2.4 billion
31 May 2022R11.9 billionNot Reported+R4.6 billion

The table below shows Cell C’s half-yearly figures based on its own reports.

Reporting periodRevenueEBITDANet profitCapex
H1 2017R7.7 billionNot reported-R1.0 billionNot reported
H2 2017R8.0 billionR7.8 billion*+R5.1 billionR1.2 billion*
H1 2018R7.8 billionNot Reported-R0.6 billionNot reported
H2 2018R7.9 billionR2.9 billion*-R7.3 billionR2.1 billion*
H1 2019R7.5 billionR1.4 billion-R0.9 billionR0.2 billion
H2 2019R7.6 billionR2.4 billion-R3.2 billionR0.03 billion
H1 2020R6.9 billion-R5.3 billion-R7.6 billionR0.11 billion
H2 2020R7.2 billionR8.1 billion+R2.1 billionR0.09 billion
H1 2021R6.6 billionR1.3 billion+R0.1 billionR0.11 billion
H2 2021R6.8 billionR1.3 billion-R0.5 billionNot reported
H1 2022R6.5 billionR0.4 billion-R2.0 billionNot reported
H2 2022Not ReportedNot ReportedNot ReportedNot reported
*Annual figures

ARPU decline

Blue Label said in its annual results presentation that Cell C’s average revenue per user (ARPU) declined over the last year.

Although Cell C and Blue Label did not disclose the ARPU figures, it provided a chart comparing the ARPU with the subscriber base.

What was striking was the rapid decline in ARPU from March 2023 to May 2023, when subscribers showed a significant increase.

The ARPU plummeted from around R80 per user to approximately R50 per user over three months, which was never seen before.

This decline may be related to signing up numerous new Capitec Connect clients with multiple SIMs, but this information was not shared.

Brett Levy said Cell C’s ARPU was high compared to the industry despite a reduced base, indicating higher spending per customer.

However, an analysis by Daily Investor showed that Cell C’s ARPU is significantly lower than Vodacom, MTN, and Telkom’s.

Cell C confirmed that its reported ARPU is based on the entity ARPU, also known as the blended ARPU, which is much lower than its competitors.

However, it said the prepaid market remains a material contribution for Cell C, which is not the case for the other mobile operators.

It said the prepaid ARPU for Cell C was R67 at the end of May 2023. This would be above the released data for MTN (R66), Telkom (R64) and Vodacom (R58).

“Therefore, our comment is based on the strength of our prepaid ARPU,” Cell C said.

OperatorSouth African ARPU
Cell CR70 to R80

Lofty new goals

Despite missing its previous guidance, new Cell C CEO Jorge Mendes is confident they will turn the mobile operator around and make it profitable.

He said Cell C still has brand value, which they will build on to make it a brand that South Africa really loves.

“Cell C must become a real purpose organisation that adds value just beyond a SIM card and a tariff plan.”

Mendes promised Cell C would be a different organisation in the next 18 to 24 months.

As part of the new strategy, they want to reach 15% revenue market share in South Africa to become sustainable, which will require a big jump in revenue.

Mendes said they are currently working on their new strategy, which would require a minimum of 15% revenue market share.

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

The latest annual reports from Vodacom, MTN, Telkom, and Cell C’s main shareholder, Blue Label Telecoms, show that it will take considerable effort from Mendes’ team to achieve this target.

Over the previous financial year, Cell C generated revenue of R11.9 billion, which equates to a market share of around 7%.

To achieve a market share of 15%, based on historical financial data, Cell C must generate around R26 billion to R27 billion – significantly more than double its current revenue.

During the Blue Label results presentation, Jorge told investors they were over halfway there. However, this misrepresents the facts (see the table below).

Cell C explained that in a multi-sim environment, revenue market share is benchmarked in a set period in a fluctuating market.

“Half of the target of the stated ambition is based on our assessment of our current performance against the market,” Cell C said.

The table below shows the revenue and market share of the four major mobile operators in South Africa.

OperatorSA RevenueRevenue Market Share
VodacomR84.7 billion50%
MTNR50.6 billion30%
TelkomR21.6 billion13%
Cell CR11.9 billion7%

Cell C bulls remain positive

Cell C and Blue Label bulls shrugged off these concerns and remain positive that the mobile operator will recover and generate billions for its holding company.

Sharenet portfolio manager Dylan Bradfield said Cell C’s new CEO, Jorge Mendes, is the “real deal” with great experience.

Mendes was the chief officer of Vodacom’s consumer business unit before joining Cell C and is an astute telecommunications and retail operator.

The bulls also pin a lot of their hopes on Cell C’s mobile virtual network operator (MVNO) deal with Capitec Bank.

Capitec aims to get between 10 million and 12 million of their banking clients onto Capitec Connect in the medium term. Should Capitec achieve this lofty goal, it will double Cell C’s subscriber base.

MVNO margins are good as no marketing and advertising is needed to gain new clients, and Capitec serves the subscribers.

The partnership is off to a good start. Since Capitec Connect’s launch less than a year ago, it has issued over 1 million SIMs.

Capitec wants to disrupt the telecommunications market, and with millions of banking clients, it can divert a significant amount of airtime purchases to its account holders.

Cell C bulls are not particularly concerned that MTN will price Cell C out of the market as it is anti-competitive and will hurt their relationship.

Vodacom and MTN benefit from their roaming agreements with Cell C, and crushing the mobile operator through a price war does not serve their cause.

Mendes also clarified that he does not want to engage in a price war, which should dampen Vodacom and MTN’s enthusiasm to reduce prices.