Nearly two months into the Cell C top job (officially) and Douglas Craigie Stevenson has described the struggling group in a manner with which many market watchers would probably agree.

“It does look like a horror story at Cell C,” said Craigie Stevenson, who was appointed in early August 2019 to head SA’s third-largest telecommunications company after he was in an interim role for five months.

On Thursday 26 September, Cell C unveiled a net loss after tax of more than R8-billion for the year ended 31 May 2019, compared to a loss of R656-million for the previous comparable period.

The company’s total liabilities (R23.2-billion) now exceed the value of its assets (R18.4-billion), rendering it technically insolvent.

This is a company that was downgraded in August 2019 by S&P Global Ratings to default status – the credit rating agency’s lowest-possible “junk” rating. In July, Cell C had failed to make interest payments worth R194-million on certain loan facilities totalling 40% of its total debt as at December 2018.

Cell C battles with an immediate debt load of R8.9-billion. It continues to buy more time on its debt repayments, with lenders agreeing to extend the maturity of an existing R1.2-billion facility, which would have matured in August 2019.

Although Craigie Stevenson joined Cell C as a chief operations officer in October 2017, he offered a frank diagnosis of what went wrong at the company, putting the blame squarely on decisions taken by previous management since Cell C launch in 2001.

Cell C was previously led by Jose Dos Santos between 2014 and March 2019, a period in which the company struggled to make consistent profits because it had a hefty debt, which was used for consumption rather than investing in profit-inducing telecommunications infrastructure.

And over the past 19 years, it has clocked up losses of more than R23-billion.

“The company has not focused on performance and performance management, which is important for a business like this with huge levels of transactions going on… There were bad transactions that were made,” said Craigie Stevenson at a results presentation of Blue Label Telecoms, which owns 45% of Cell C.

“The business is taken seriously by the management team for a change. We are getting rid of costs and are understanding the performance culture of the business.”

A turnaround?

For the year ended May 2019, Cell C’s revenue grew by a paltry 1% to R15.4-billion, which was boosted by a 4% growth in service revenue to R14.1-billion. Meanwhile, its earnings before expenses, taxes, depreciation, and amortisation (Ebitda) were 19% lower at R3.4-billion due to infrastructure investments.

However, management has talked up the company’s performance for the three months to end-August, with Craigie Stevenson saying Ebitda is up 18% – an early sign of a turnaround in Cell C’s fortunes.

He said Cell C had valuable spectrum and a large customer base of 16 million active users – all of which it could leverage to improve its position. His hubris is based on two events – the conclusion of a full roaming agreement with MTN, and Cell C’s ongoing recapitalisation programme (or cash injection).

Cell C already uses MTN’s network in areas where it does not have adequate coverage – it’s a partial agreement with MTN. But this agreement has been controversial, with MTN recently saying that Cell C had failed to make payments on its service agreement, with Cell C having an unpaid bill of R393-million (as of June 2019).

But Cell C said it is in negotiations with MTN for an extended roaming agreement.

“One of the big things about the agreement is that we previously had 6,500 roaming sites and the agreement (with MTN) puts us on par with other networks, giving us 13,000 sites. Cell C went to a 4G network offering, which allowed it to compete with the biggest mobile providers.”

About Cell’s recapitalisation. The company might receive a cash injection from the Buffet Consortium, led by reclusive billionaire Jonathan Beare. The consortium has agreed to take a minority stake in Cell C that will shore up its balance sheet and pay down debt. However, the deal, which was first proposed in February 2019, has still not been concluded.

One analyst said both events are highly speculative for Cell C as MTN could decide not to enter into a full roaming agreement and the Buffet Consortium could walk away from a deal with Cell C, worsening its woes.

Blues for Blue Label

Cell C has been a headache for Blue Label since it bought a 45% stake for R5.5-billion in 2017.

Before Blue Label backed Cell C, it was a profitable distributor of prepaid airtime, starter packs, data and electricity tokens (its core business). Today, Blue Label has written down the value of Cell C to zero and borrowings worth more than R1.5-billion (compared with R18-million before buying Cell C).

As expected, trading losses and debt problems at Cell C pushed Blue Label into a R6.6-billion loss in the year to end-May, which is more than double its market capitalisation of R3-billion. It was forced to sell two assets – a stake in subsidiary Blue Label Mobile for R450-million and a stake in cellphones and tablets distributor 3G Mobile for R544-million. It will use the proceeds from the sales to settle Cell C debt.

It is the first time Blue Label has had to sell its assets in its 18-year history.

“Cell C still needs a massive recapitalisation from Blue Label. It takes a long time to build (telecommunications) critical mass, which is an important aspect to make Cell C profitable. The three players (MTN, Vodacom and Telkom) have significant market shares, with Cell C still playing catchup,” said Ron Klipin, a senior portfolio manager at Cratos Wealth.

Blue Label Co-CEO Brett Levy said the company is still committed to Cell C.

“We are fully confident that cell C will be a sustainable company. And in the next recapitalisation, it will be a good company.”

Levy is uncertain about whether Blue Label’s Cell C shareholding (45%) will be maintained or reduced to accommodate the Buffet Consortium. BM

(Disclosure: The writer owns Blue Label shares)