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Why Net1 called off Blue Label deal

Paula Gilbert
By Paula Gilbert, ITWeb telecoms editor.
Johannesburg, 02 Jun 2017
Net1's board says newly appointed CEO Herman Kotz'e did not unilaterally terminate the Blue Label investment.
Net1's board says newly appointed CEO Herman Kotz'e did not unilaterally terminate the Blue Label investment.

Net1 UEPS Technologies said its dwindling share price meant it could only afford to move forward with two out of three planned investments, leading to its decision to terminate an agreement to invest R2 billion in Blue Label Telecoms.

The technology group yesterday announced it and Blue Label had mutually agreed to cancel a subscription agreement announced in October 2016, whereby Net1 would have acquired a 15% stake in Blue Label.

Net1 will, however, continue with its plans to buy a 15% stake in mobile operator Cell C for R2 billion, as well as a 49% interest in prepaid airtime and starter pack distributor, DNI-4PL Contracts (DNI).

"The proposed three investments by Net1 required the utilisation of cash reserves, bank finance and the issuance of shares of its common stock to fund the transactions," Net 1 explained in a SENS statement this morning.

"The material reduction in the Net1 share price in the first five months of 2017 and the lack of volume demand for its shares at this time would have made it detrimental to Net1 shareholder value for it to proceed with a share placement.

"The board accordingly concluded that Net1 could only use cash resources and bank debt, and could therefore only conclude two of the three investments," it said.

Net1 has a primary listing on the Nasdaq in the US and a secondary listing on the Johannesburg Stock Exchange (JSE). The group's share price has dropped over 17% year-to-date and was trading at around $9.48 on the Nasdaq yesterday. Its stock on the JSE has fallen almost 24% this year and closed yesterday at R123.50 per share.

Net1 said it approached Blue Label and both parties agreed that Net1 would not subscribe for shares in Blue Label and would proceed only with the investments in Cell C and DNI.

The board of Net1 also said it wished to clarify that newly appointed CEO Herman Kotz'e had not unilaterally terminated the subscription agreement with Blue Label.

"The decision not to invest was made by the full Net1 board before the end of May 2017," it said.

Kotz'e took up the reins at Net1 yesterday, after previous CEO Serge Belamant stepped down to take up early retirement and a controversial $8 million (R105 million) exit package.

Cell C in sights

In December 2015, Blue Label revealed it planned to buy a 35% stake in Cell C for R4 billion, as part of the mobile operator's recapitalisation plan. In October 2016, Blue Label then decided to up that investment to R5.5 billion to gain a 45% stake in Cell C. At the time, Blue Label also announced Net1's plans to invest R2 billion in it, which would help it to part fund its investment in Cell C.

However, now Blue Label says it has signed binding subscription agreements with "alternative third-party investors", which will subscribe for R2 billion worth of Blue Label shares, in terms of a vendor placement, at a price of R15 per share.

Cell C's long-planned recapitalisation has been slow going, but in February, Blue Label reaffirmed the deal was going ahead, and it expected the conclusion of the relevant transaction agreements to be done by no later than 30 June 2017.

The recapitalisation plan will see Cell C's maximum net borrowings reduced from over R20 billion to R6 billion. Post-recapitalisation, Blue Label would own 45% of Cell C; 3C Telecommunications would own 30%; Net1 would own 15%; Cell C management would own 5%; and Cell C staff the remaining 5%.

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