Cell C finances raise serious concerns

Jorge Mendes

Cell C’s latest financial figures raise serious questions as they differ vastly from what the mobile operator and its main shareholder, Blue Label, previously shared with the market.

On Monday, Cell C published a trading update which included its audited numbers for its 2021 and 2022 financial years.

It revealed a company in severe financial distress with a declining user base, flat revenue, and a dismal balance sheet.

Despite its recapitalisation in September 2022, Cell C’s liabilities of R15.092 billion dwarves its R5.798 billion in assets. It translates into negative equity of R9.294 billion.

It shows that Cell C is technically insolvent and would have to do something spectacular to turn the company around.

Another thing which stood out was that the figures Cell C shared with the market differed significantly from the previous market updates.

For example, Cell C previously reported that it made a R2.45 billion profit in its 2021 financial year. That has now been changed to a R92 million loss.

Cell C also previously reported earnings before interest, taxes, depreciation and amortisation (EBITDA) of R2.85 billion for its full year 2021.

Its latest trading update states that the EBITDA for the 2021 financial was only R0.2 billion – 92% lower than its previous report.

Cell C acting CFO El Kope explained that the discrepancy between previous reports on the most recent market update is that the latest figures were audited.

“Previous numbers we provided to the market were not audited. The numbers we are now sharing are fully audited,” she said.

She explained that the changes between each report resulted from the latest numbers being audited.

Cell C Income StatementInitial ReportNew reportDifference
RevenueR13.38 billionR13.00 billion3%
EBITDAR2.85 billionR222 million92%
New loss(R396 million)(R92 million)77%

Big balance sheet discrepancies

Even more striking than the big chances in income statement numbers is how much Cell C’s balance sheets changed from one report to the next.

Cell C initially said its assets at the end of 2021 were R10.7 billion. In its current report, it said assets at the end of 2021 were actually worth only R6.3 billion – a R4.4 billion difference.

What is of even more concern is the huge difference between Cell C’s reporting and that of its main shareholder, Blue Label.

For example, Cell C said it had R5.798 billion in assets, R15.092 billion in liabilities, and net equity of negative equity of R9.294 billion at the end of December 2022.

Blue Label’s latest market update showed that Cell C said it had R15.015 billion in assets, R19.062 billion in liabilities, and negative equity of R4.047 billion at the end of May 2024.

Kope said the difference in balance sheet numbers is because Blue Label has a different year-end to Cell C. However, the large difference raises questions about her explanation.

Should Kope be correct, it means that Cell C’s assets increased by 159% – from R5.798 billion to R15.015 – in five months. It does not make sense.

The table below shows the difference between Cell C’s audited results and what Blue Label reported.

Cell C Balance Sheet31 Dec 202231 May 2023Difference
Total AssetsR5.798 billionR15.015 billion159%
Total LiabilitiesR15.092 billionR19.062 billion26%
Equity(R9.294 billion)(R4.047 billion)56%

Cell C explains

Cell C explained that the difference between the total assets accounted for by Blue Label Telecoms as of May 31, 2023, and Cell C’s total assets on December 31, 2022, amounts to R9.2 billion.

Of this amount, a permanent difference exists between the total asset value of Cell C at a statutory stand-alone level, and the total asset value accounted for by Blue Label when equity accounting for its investment in Cell C.

“This permanent difference totals R10 billion and is related to the requirements of IFRS 3 – business combinations,” Cell C said.

“This standard requires the acquirer to recognise and measure the identifiable assets, liabilities, and contingent liabilities acquired at their fair values at the initial acquisition date.”

In this context, when Blue Label acquired its initial 45% equity interest in Cell C in August 2017, it was required to conduct a purchase price allocation exercise under the requirements of IFRS 3 – Business Combinations.

An independent third-party expert performed this valuation exercise.

Blue Label identified intangible assets at the initial acquisition date, comprising the spectrum license and brand value, totalling R10 billion.

This permanent difference of R10 billion is included in non-current assets, and the deferred taxation thereon amounting to R2.7 billion is included in Non-Current Liabilities, both of which are included on page 53 in the notes to Blue Label Telecoms’ financial statements.

On the exclusion of this permanent difference of R10 billion, Cell C’s total assets as of 31 May 2023 would have equated to R5 billion.

Excluding this permanent difference of R10 billion, the remaining decline of R800 million between December 31, 2022, and May 31, 2023, pertains to Cell C’s movement in its total assets for the above period.