Cell C is technically insolvent, says analyst

Samuel Mungadze
By Samuel Mungadze, Africa editor
Johannesburg, 23 Aug 2019
Cell C has been under pressure for some time.
Cell C has been under pressure for some time.

A senior market analyst is challenging Cell C’s largest shareholder, Blue Label Telecoms, to provide financial evidence that SA’s third largest mobile operator is solvent.

David Shapiro, deputy chairman of Sasfin Securities, says it’s disturbing that shareholders in the mobile operator have chosen silence instead of explaining the future of the company to the markets.

SA’s third-largest mobile operator was yesterday downgraded by ratings agency S&P Global Ratings to “default” status, after Cell C failed to make interest payments in July.

S&P announced: “The downgrade follows Cell C’s announcement on 19 August that it has failed to make approximately R194 million in interest payments due July 2019 on certain bilateral loan facilities totalling 40% of its total debt at 31 December 2018.”

“Tell us what’s happening: is Cell C a going concern or not? If it is, how are you going to finance it? It’s worrying that there is no real news coming from shareholders. When you default to me, it implies you are insolvent,” says Shapiro.

“It’s scary. If S&P says Cell C is defaulting, it means Cell C is in deep trouble. Blue Label must tell us what’s going on; they own 45% of the company, they control the board. In company law, if you control the board, it means that company is a subsidiary [of Blue Label]. They must tell us what’s happening now, not wait for a month.”

The veteran markets analyst says further: “When you get to a position where you can’t pay your debts, you need to worry. That means you will need to refinance the debt in billions. Who wants to do that for a company that has never made profit in the 17 years it has been operating? It’s a disturbing factor.”

Cell C has a debt burden of some R6 billion (with interest rates as high as 17%), and has now fallen behind on payments for these services.

In the past six months, it reportedly failed to pay MTN its dues, burdening the Pan-African telco with an unpaid bill of R393 million.

MTN has since written off R211 million of the amount, and is now “evaluating a sustainable solution to the network roaming agreement with Cell C”.

Telecoms analyst at Africa Analysis, Dobek Pater, says the newest downgrade by S&P, coupled with the lack of detail on Cell C’s restructuring, will make negotiations with financial institutions for future funding more difficult.

He says ultimately, Cell C needs to decide how to compete in the market sustainably.

“Extensive and continuous investment in infrastructure may not be sustainable, given Cell C’s history,” he says.

Pater tells ITWeb: “This additional downgrade at this point in time is not all that material, as Cell C has already indicated to the market what it is trying to achieve in terms of restructuring its operations and balance sheet. What it has not specified is the timeline by which it intends to complete this latest round of restructuring.

“The market will wait and see what will be the ultimate result of this restructuring, although this needs to be concluded sooner rather than later to instil new confidence in various stakeholders.”

He believes the operator may need to move more strongly in the direction of infrastructure (passive and active network) sharing, which is something it may be working on with MTN.

Cell C entered into a multibillion-rand long-term roaming agreement with fellow mobile operator, MTN, which provides a major boost to Cell C's 4G coverage in SA.

Cell C CEO Douglas Craigie Stevenson.
Cell C CEO Douglas Craigie Stevenson.

“This would help Cell C reduce its future capex, although it is likely to increase opex. It may also need to focus on specific segments of the consumer and business markets, rather than try to offer a wide range of products or services to all market segments. This would mean reduction of product or service range, which costs money to develop, market and support,” explains Pater.

Cell C has been under pressure for some time, facing myriad of problems, including job stoppages, declining revenue and debt management challenges.

In June, the operator was also downgraded by the global rating agency.

S&P downgraded Cell C’s debt rating further after the operator renegotiated terms of a R1.4 billion debt.

Yesterday’s downgrade is the third time the troubled operator has been downgraded by S&P for its debt profile.

In April, the agency lowered Cell C’s issuer credit rating to CCC- from CCC+, placing it deeper in trouble territory; now, it has been lowered further to “SD” (selective default) from 'CCC-'.

Cell C's challenges have also hit its largest shareholder, Blue Label Telecoms, knocking R3 billion off the company’s stock on the Johannesburg Stock Exchange.

In a statement on Thursday, newly-appointed Cell C CEO Douglas Craigie Stevenson said: “We are committed to simplifying the business model, right-sizing and optimising the business. We have engaged with S&P throughout this process and believe we are on the right track with the transactions currently being finalised.”