A proposed R4 billion deal between Blue Label Telecoms and Cell C is a positive move, according to analysts.
"There certainly is some strategic fit for Blue Label. The company provides a number of services via mobile platforms and the investment will give them a stake in a network which could be viewed as a natural progression for Blue Label," according to Ovum senior analyst, Richard Hurst.
Yesterday Cell C laid out a restructuring plan for the company's capital which includes a R4 billion capital injection from Blue Label, in return for a 35% stake in the mobile operator.
"I think that for the size of the equity stake and the implications of the investment for both Cell C and Blue Label, the R4 billion price tag seems fair," adds Hurst.
Blue label says the proposed transaction provides a "compelling value proposition" for the company and vertical integration would give "both companies the opportunity to realise synergies in product distribution". It will also position Blue Label to benefit from the improved operational and financial performance that the combined platform would create.
BMI-TechKnowledge director Brian Neilson says the deal must have been fair to Blue Label for them to have considered it.
"Longer term, Cell C is on an upward trajectory towards becoming a profitable business, and any mobile licence is a potential to print money," says Neilson.
The other part of the restructuring plan sees Cell C management, on behalf of its employees, submitting an offer to co-invest in the company with Cell C's current shareholder, 3C Telecommunications and Blue Label.
"Cell C employees will then hold around 30% of the total issued share capital in Cell C at a cost of R2.5 billion at the conclusion of the restructuring programme," the telco says in a statement.
If successful, the restructuring will result in 3C Telecommunications holding 35%, management and staff 30% and Blue Label 35% of Cell C.
Currently 3C Telecommunications owns 100% of Cell C while Dubai-based Oger Telecom holds a 75% stake in 3C Telecommunications and Cell C's BEE partner CellSAF owns the other 25%.
Dropping Debt
Part of the restructuring sees Cell C refinancing its debt in South African rand, and not foreign currency.
"Key for the survival of any of the network operators will be the need to reduce and manage their debt. The fact that the debt will be held in rand will certainly give Cell C some comfort against rand dollar declines," says Hurst.
This is particularly timely as the rand hit a record low this week after president Jacob Zuma removed finance minister Nhlanhla Nene from his post.
The deal sees Cell C's net debt reduced from high double-digit numbers to a maximum of R8 billion or less when implemented. The target is to reduce the debt further over the next 12 months, the company says.
"The restructuring will allow us to support our continued growth, network expansion and investment in data networks," according to Cell C CEO, Jose Dos Santos.
"The restructuring of the capital for Cell C will imply that the company will be able to manage its financial responsibilities. I think that the real impact is that the company is seeking to move the burden of capex from shareholders via this new injection of capital form Blue Label. And naturally for Oger Telecom it shifts the existing burden and will allow the entity to be more comfortable with the operator," adds Hurst.
Employee ownership
Neilson says the deal is positive "in as much as it brings stability to the staff, reduces uncertainty about the company's future and should act as a motivator".
Dos Santos says if the deal is approved it will become one of the largest employee ownership deals in the country.
"Through this transaction, we will see more employees of our company share in the success as they continue to deliver," according to Dos Santos.
"I would need to see the finer details of the deal, but in general it seems like one of the objectives is to incentivise the staff to work together to ensure the company's success," comments Neilson.
Hurst agrees that it is "certainly a step in the right direction and Cell C is doing the best with the hand that has been dealt to them".
Blue Label says it has received significant support in writing from its shareholders for the proposed transaction.
The company is one of the leading distributors of pre-paid airtime and secured electronic tokens of value in South Africa, India and Mexico. Blue Label says it has for a number of years acted as one of the primary distribution channels for Cell C's products, resulting in a strong relationship between the two companies.
The restructuring is subject to regulatory approvals and the expected effective date is 1 June 2016.
Share