Opinionista Ron Derby 22 November 2019

Is Cell C worth R1?

OK Bazaars was once sold for a nominal R1 in one of the most daring transactions in South Africa’s corporate history. Are we about to see something similar in the cell phone sector?

When Shoprite’s retail maestro Whitey Basson bought the loss-making OK grocery store chain for R1 from South African Breweries in 1997, some analysts wondered whether it was “too expensive”. OK was bleeding money and seemed a lost cause.

Which brings us to the question analysts should be asking about the proposed acquisition of Cell C. Is the country’s third-biggest mobile phone operator worth R1?

This question has been on my mind as the struggling company and its board consider whether to accept a bid from Telkom or pursue yet another recapitalisation plan for an operator that has failed to find its feet since being founded in 2001.

Cell C’s debt position sits at about R9-billion and there’s little in the tea leaves to suggest the mobile carrier, owned by Blue Label Telecoms, will be able to trade itself out of this debt chokehold. This is regardless of how executives pitch roaming agreements with MTN as a panacea to their ailments.

Now, don’t get me wrong in the questioning of the price someone may pay for Cell C. Value does lie within. When Shoprite acquired OK for that measly R1 it overnight became the country’s largest food retailer and, with that scale, would go on to launch a market share war against the establishment in the form of Pick n Pay.

Whatever the price that would get a deal over the table, it would give Telkom telecommunications “gold” in terms of additional spectrum and 17 million mobile subscribers – significantly boosting its base of just under 10 million.

British-controlled Vodacom has the country’s largest customer base of more than 43 million. Acquiring Cell C would make Telkom a much bigger competitor to the second-biggest operator, MTN, with under 30 million local subscribers.

For some years now, the Rob Shuter-led MTN has struggled in its domestic market with numerous executive changes, with much-heralded Altron CEO Mteto Nyati being on a long list of former chief executives. MTN continues to lose subscribers, as shown in its most recent update which showed its South African numbers had shrunk by 1.9 million.

Were you to combine sluggish local performance with the well-documented regulatory battles that have followed MTN in its biggest market in Nigeria since 2015, you’d have the answer to its almost 60% share-price plunge over five years. You’d also come to understand why it would be so invested in extending roaming agreements with a troubled and bad payer like Cell C in recent weeks – an attempt to ward off competition from Telkom and shut it out of any acquisition.

Should Telkom be successful in its bid, its mobile arm wouldn’t be far off the size of MTN and it, like Vodacom, would have a management team not distracted by dealing with a monstrous Middle Eastern and African empire.

While I think Blue Label, with its share price under significant pressure since the Cell C tie-up two years ago, would love a resolution to its headache, it strategically needs to hold onto the mobile operator as its client. The Mark and Brett Levy-founded firm is both shareholder and supplier and a takeover would put an end to that relationship. Or, at best, a buyer such as Telkom would want to see normalised agreements that aren’t outliers in market practice.

In the Cell C story labyrinth are many related-party deals that have left little flowing to the mobile operator’s bottom line and have not helped with its debt position. If lenders such as Nedbank are going to be the final arbiter of its future, they would have to pay heed to these transactions and ask just how they affect debt repayments.

Whoever bids for Cell C, Blue Label, at this point, is at least as concerned about its future client relations as it is about being a shareholder. If there’s a takeover battle, the board’s central drivers will be about the future client relationship with Blue Label. But, if it’s a decision that will be largely determined by Cell C’s senior lenders, rather than its board with its Blue Label appointed executives, I suspect there’ll be little dispute over a R1 price tag. BM

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