Cell C gets MTN lifeline, Telkom bid now doubtful

Samuel Mungadze
By Samuel Mungadze, Africa editor
Johannesburg, 18 Nov 2019

Cell C and Pan-African carrier MTN have reached a new, broadened roaming agreement that is expected to give the embattled mobile operator a new lease on life, potentially scuppering Telkom’s bid to control the telco.

SA’s third-largest operator has been bleeding cash for some time, failing to compete meaningfully against leading carriers Vodacom and MTN, which have superior network infrastructure and deeper pockets for sizeable capex investments.

As the bad situation persisted, rumours of a potential takeover started swelling. This bid was confirmed on Friday, when Cell C told the markets it is discussing various proposals to save the company, including Telkom’s non-binding offer.

Telkom, which signed a multibillion-rand roaming deal with Vodacom last year, also confirmed this, saying in a note to shareholders it “is in discussions with Cell C Limited regarding the potential acquisition of Cell C”.

Lot more is needed

Analysts who spoke to ITWeb say the new roaming deal provides Cell C with a lifeline, but they differed on the prospects of Telkom’s takeover bid succeeding.

Sabelo Dlamini, senior research and consulting manager at IDC Sub-Saharan Africa, does not believe the new roaming agreement will negatively impact Telkom’s bid.

“If Cell C was willing to sell, this would give more reasons for Telkom to buy, as the company would be more cost-efficient than before (although we know Telkom is more interested in Cell C’s infrastructure and customer base).

“On the other hand, this will give Cell C’s executives a second chance to have a renewed strategy in attempts to save the company.”

According to Dlamini, the MTN roaming agreement is expected to drive down network management costs and enable the company to service the debt.

“This can provide company executives room to breathe and be able to plan accordingly. But this may not be the long-term solution for the financial challenges the company is facing; a lot more than this agreement is required for Cell C to turn around,” he says.

On the contrary, Peter Takaendesa, portfolio manager at Mergence Investment Managers, says the extended MTN roaming agreement further complicates the proposed Telkom-Cell C transaction.

“It would require the combined entity to use two roaming partners until the agreements expire. Using multiple national roaming partners is more expensive, as agreements normally come with required minimum payments.

“However, we believe Telkom was fully aware that Cell C was in the process of concluding this transaction and must have taken it into account in arriving at the offer for the company. It will all come down to pricing expectations of the parties involved.”

Explaining why the roaming agreement is important to Cell C’s turnaround strategy, Takaendesa says: “If Cell C’s balance sheet problems are resolved, this extended roaming agreement could provide the company with some relief as pressure to invest large sums of money upfront into the network will be reduced.

“This does not mean the required cost of investing in the network disappears but is only shifted into operating expenditure instead of lump sum capex spend. Whether Cell C will become profitable and sustainable largely depends on the terms of the roaming agreement and how they will restructure their cost base.”

Mixed roaming results

Africa Analysis telecoms analyst Dobek Pater says Telkom is currently roaming on the Vodacom network and “if Telkom were to acquire Cell C, it would mainly acquire the Cell C customer base as the most valuable asset.

“It may then have to renegotiate its roaming agreement with Vodacom based on the larger integrated subscriber base (Telkom Mobile + Cell C). I think Telkom would have anticipated the conclusion of the 4G roaming agreement between Cell C and MTN when it was preparing its acquisition offer.”

Pater says the roaming agreement should enhance Cell C’s ability to offer better quality services (primarily high-speed mobile broadband, based on 4G technology) to its subscribers, on a national basis.

“This would likely result in greater customer loyalty and decreased churn levels and possibly see some average revenue per user uplift.

“However, at the same time, Cell C’s opex will increase through the expanded roaming agreement. Also, a large portion of the Cell C customer base is price-sensitive, so its loyalty may be limited as it seeks lower cost promotions across the different service providers. Overall, the impact should be positive but it may be limited.”

At the time of publishing, Telkom shares were down 3.59%.