Telkom will be better-placed to compete against Vodacom and MTN in the consumer space if it moves to acquire Cell C.
This is according to analysts, following reports that Telkom is considering a R13 billion bid for the financially constrained mobile operator.
The reports come amid Blue Label Telecoms being in advanced stages to buy a 45% stake in Cell C for R5.5 billion as part of a planned recapitalisation of the company.
The proposed recapitalisation will reduce Cell C's net debt to approximately R8 billion and enable it to continue to deliver on its growth strategy in a sustainable manner. Earlier this month, S&P Global Ratings lowered its long-term corporate credit rating on Cell C to 'D' (default) from 'SD' (selective default) after the mobile network missed an interest payment.
Industry speculation
Following the latest reports about the Telkom bid, the fixed-line operator would not comment on the rumours, with spokesperson Jacqui O'Sullivan saying: "We do not comment on industry speculation and rumour."
In an e-mailed statement to ITWeb, Karin Fourie, Cell C's executive head of communications, noted: "The Cell C recapitalisation remains on track and is supported by the equity investors as well as the existing lenders to the business.
"All lenders have expressed their support for this process which remains ongoing. Once complete, it will lay the foundation for an exciting future."
In response to the speculation, Blue Label's head of investor and media relations, Michael Campbell, told ITWeb that Blue Label is a listed company on the JSE with continuing obligations to its shareholders, and as such, it cannot comment on market speculation or any speculative outcomes.
"What we can say, in contextualising Blue Label's proposed acquisition of a 45% stake in Cell C for R5.5 billion, is that we understand that Cell C continues to progress restructuring to establish a sustainable capital structure."
This is not the first time Telkom has been linked with SA's third mobile operator. In November 2015, Telkom confirmed what the market had suspected for months: that it was in talks to buy its rival.
However, a disagreement over the value of Cell C saw Telkom abandon its plans. JSE-listed Telkom, which is 40% government-owned, confirmed to the market that it and Cell C's majority shareholder, Oger Telecom, had called off negotiations for a possible sale.
Mobile market
Naila Govan-Vassen, senior industry analyst for ICT at Frost & Sullivan Africa, says: "Telkom's potential acquisition of Cell C has been a part of their strategy since 2015; during that year a proposed merger between the two entities got cancelled as a result of differences regarding the assessment of the value of the transaction."
Govan-Vassen believes this transaction would give Telkom the opportunity to expand its footprint in the mobile market, adding to its Telkom Mobile unit. "It would push the combined unit's share of the subscriber market to around 30% of the market, and offer competitive mobile services to enterprises and consumers."
According to Govan-Vassen, offering services beyond fixed-line services would lay the foundation for Telkom to provide quad-play offerings in the long-term, which many of the global players are already exploring.
"Their strategy somewhat mirrors what British Telecom, which dominated the fixed-line market, have done in the United Kingdom with their acquisition of Everything Everywhere. The move would see Telkom better-placed to compete against Vodacom and MTN in the consumer space."
Richard Hurst, director of enterprise research at Africa Analysis, is also of the view that Cell C would be a good fit for Telkom and would boost the operator's position in the mobile market.
"Besides the obvious fact that the acquisition would boost Telkom Mobile subscriber numbers and related mobile revenues, there are other softer issues such as the ability to drive fixed mobile converged and unified communications services," says Hurst.
Meanwhile, World Wide Worx MD Arthur Goldstuck says the Telkom-Cell C deal is feasible, as the price tag is probably equivalent to Telkom's profit for a year. "This would, of course, drag down their profitability for years to come, but it's not impossible or even improbable."
He adds the deal will give Telkom an instant mass subscriber base, which it has not been able to build organically. "The acquisition would give it a total subscriber base of well over 20 million. While many of the new subscribers are low-value in terms of revenue per user, it is a base from which Telkom can mount a far more aggressive competitive strategy."
Goldstuck notes the Blue Label deal should have been signed and sealed by now but, clearly, there are still issues with Cell C. These include both a legal challenge to the deal and Cell C's apparent failure to pay interest on its debt. He believes the Telkom deal would both rescue Cell C and give Telkom an equal place at the table of major mobile operators.
"Telkom previously looked at buying Cell C, but the deal fell through. This means the appetite has always been there, but the conditions have not been right and the prevailing circumstances did not allow for a deal that was palatable to Telkom. The circumstances seem to have changed in favour of Telkom, so a deal is much more likely now."
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