Cell C rejects Telkom’s takeover bid

Samuel Mungadze
By Samuel Mungadze, Africa editor
Johannesburg, 29 Nov 2019

Tie-up discussions between Cell C and Telkom have been called off.

The Cell C board has rejected the non-binding offer but Telkom, in a note to shareholders this morning, says it “continues to believe the offer is a compelling proposition that would have created significant value for all stakeholders including Telkom's shareholders”.

The company has since advised shareholders not to exercise caution when dealing in Telkom securities.

Just over a week ago, both carriers informed the markets that preliminary discussions of a tie-up were ongoing.

At the time, Cell C was discussing various proposals, including Telkom’s non-binding offer, with independent financial and legal advisers appointed by its lenders.

It later went on to sign a broadened roaming agreement with Pan-African carrier MTN, which it said would give the troubled telco a new lease on life.

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.

Cell C’s debt has ballooned from R7.44 billion to R8.24 billion, which the company says was driven by increased capital expenditure and working capital drawdown facilities.

It recently reported a loss of R8 billion for the year ended May, from a previous year loss of R656 million.

The operator suffered major setbacks this year, receiving three downgrades by rating agency Standard & Poor’s over its debt.

In April, the agency lowered Cell C’s issuer credit rating to CCC- from CCC+, placing it deeper in trouble territory.

In June, the operator was once again downgraded after it renegotiated terms of its R1.4 billion debt, and in August, it received a downgrade for the third time for its debt profile.

Analysts who spoke to ITWeb at the time were in consensus the new roaming deal provides Cell C with a lifeline, and poured cold water on the prospects of Telkom’s takeover bid succeeding.

Peter Takaendesa, portfolio manager at Mergence Investment Managers, said the extended MTN roaming agreement complicated the Telkom deal.

“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.”

Africa Analysis telecoms analyst Dobek Pater explained 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.”