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Cell C in debt 'hole'

Nicola Mawson
By Nicola Mawson, Contributor.
Johannesburg, 29 Jun 2015
Cell C will invest the R3.3 billion it just raised via bonds in its network and its cash requirements.
Cell C will invest the R3.3 billion it just raised via bonds in its network and its cash requirements.

Cell C, which is SA's third-largest network with 20 million subscribers, has increased its debt just after settling a R2 billion bond, as it pumps money into expanding its coverage.

Analysts say its latest round of funding could be a bid to tidy up its books in preparation for a long-rumoured buyout offer, which they say is now looking increasingly likely.

On Friday, the operator said it had raised EUR240 million - or R3.3 billion - on the bond market. This takes the total amount of euro bonds it has secured to EUR400 million, or R5.5 billion, which needs to be paid back in three years' time.

Cell C says the new bonds will be used to fund capital expenditure and cash requirements as it rolls out its business strategy. However, analysts are concerned about its rising debt levels, as Standard & Poor's (S&P) has previously noted Cell C has "strongly negative" free cash flow and its net debt is about seven times that of its operating profit. By comparison, Vodacom's net debt to earnings before interest, tax, depreciation and amortisation is at 0.6 times.

S&P had warned Cell C risked being downgraded to a level that would make it a substantially risky investment if it failed to pay back R2 billion in bonds by the end of this month. Cell C says the bond under question, a dollar-denominated loan, has been repaid, although it did not provide further details.

Wait and see

Ovum analyst Richard Hurst notes Cell C has had "massive" debt issues since it started operating. The company was licensed as the third operator in 2001.

Hurst says although Cell C has to "keep up with the Joneses" and pump more into its network to improve coverage, its debt situation is worrying. He says Cell C needs to find a smarter way of expanding its network and adding new subscribers to its base. "When you're in a hole, stop digging."

Cell C has spent more than R4 billion in the past two years to increase capacity and coverage. It says it does not comment publicly on its debt.

Hurst says Cell C's increased debt, and its offer to help subscribers at SA's mobile duopoly buy themselves out of their contracts with a gift card worth up to R10 000, are indications the company is getting closer to being bought out. "They are looking more like a target every day. Something will force this hand of change here."

Parent company Oger has already indicated it wants to sell its majority stake in Cell C because of the most recent termination rate cuts, which do not favour Cell C as much as initially expected.

Independent analyst Paul Booth suspects there is "something behind the scenes" that would explain Cell C garnering more debt. He says this could be the company putting itself in shape for a takeover, or issues it needs to wrap up before it can be bought. "It's looking more like a clean-up situation before something big."

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BMI-Techknowledge director Brian Nielson adds Cell C's "grooming for sale has been going on for some time now", but regardless of whether it is bought out, it still needs to invest in its network and improve coverage.

Earlier this month, Cell C expanded its network capabilities when it extended its roaming deal with Vodacom, including data in the roaming contract. Nielson says this is important for Cell C as "data is everything now" and its data coverage had previously been patchy.

Cell C has been pushing hard to grow its market share and needs to get bigger, says Nielson. However, he notes the company's revenue gains have not kept pace with its customer growth. Cell C's revenue gained 16% in the year to March.

Neilson speculates Cell C's next avenue of attack will be to bolster its revenue. He notes the operator has yet to turn the profitability corner, although, if Telkom Mobile can target being profitable at operating levels this year - when it is newer and has a smaller base - Cell C should be able to make a go of it.

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