Cell C, Telkom confirm tie-up discussions

Samuel Mungadze
By Samuel Mungadze, Africa editor
Johannesburg, 15 Nov 2019

Embattled carrier Cell C says it is discussing various proposals, including Telkom’s non-binding offer, with independent financial and legal advisers appointed by its lenders.

Cell C confirmed on Friday it had received the Telkom offer.

However, the telco said: “Cell C remains focused on ensuring operational efficiencies, restructuring its balance sheet, implementing a revised network strategy and improving overall liquidity.”

It also maintained that negotiations with MTN for an expanded roaming agreement are at an advanced stage.

“Independent financial and legal advisers have been appointed representing the lenders, and constructive discussions on the recapitalisation are under way with them and other stakeholders in respect of various proposals.”

Telkom today also disclosed the takeover talks with Cell C are ongoing although they are still at infancy stage.

Due diligence

Today’s update follows the cautionary to shareholders on Tuesday that SA’s smallest carrier was in discussions with an unnamed party, which may result in an acquisition.

The rumour mill immediately went into overdrive, suggesting the target was Cell C, and today Telkom confirmed it.

In a note to shareholders, Telkom said: “Further to the cautionary announcement released by the company on SENS on 12 November 2019, shareholders are advised Telkom is in discussions with Cell C Limited regarding the potential acquisition of Cell C.

“Telkom has substantially concluded its due diligence; however, discussions are at a preliminary stage. The potential acquisition will be subject to Cell C completing a financial restructuring to ensure its gearing levels are reduced to a sustainable level as specified by Telkom and commercial contractual relationships are renegotiated to terms acceptable to Telkom.”

The deal will be subject to a number of regulatory approvals if successful.

Cell C recently told ITWeb it “will keep the door open to any conversations that will assist the company’s future viability”.

This followed market speculation that the company was in talks with China Mobile on a potential takeover bid.

If the Telkom transaction is successful, it will give the entity a fighting chance as it will have north of 27 million subscribers, to go up against MTN’s 30 million and Vodacom’s 43.9 million.

Though this isn’t Telkom’s first bid for Cell C, this time the stakes are high for both carriers.

The Telkom acquisition news came just after the telco announced its debt costs had pushed half-year profit down by more than a third.

Headline earnings per share were down to 183.4c from 288c the previous year. This, according to analysts, represented a 44% decline compared to a restated figure for the first half of 2018.

Analysts who spoke to ITWeb recently painted a grim picture of Telkom’s recovery plans because of its debt levels.

Sasfin senior portfolio manager Rob Towell told ITWeb: “It suggests that management did not have a handle on the scope of the finance charges and losses due to financial hedges taken out.

“That debt number of R9 billion (30% of Telkom’s market cap now) is going to make investors step back and bankers step in.”

Another analyst, Peter Takaendesa, portfolio manager at Cape Town-based Mergence Investment Managers, said: “[Telkom] are increasing their borrowing in order to fund the mobile business as it is not generating enough cash to fund itself. It still needs to be funded either from borrowing, or to lean on the core fixed-line business’s operating cash flow and property disposals. But for now, most of that funding has been coming from borrowing.

“So the borrowing has been going up and that is really the key issue for Telkom going forward: how do they keep growing the mobile business without damaging the balance sheet?

“That’s one area the board and management have to focus on. To say how they go forward, I know they may be saying to themselves this mobile business will start generating enough cash but so far the market is not yet convinced about that because it’s still not generating enough cash to fund its expansion.”

Debt dominates

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 company 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.

Meanwhile, regulator the Independent Communications Authority of SA has cautioned that all necessary compliance requirements pertaining to the transactions at Cell C must be fulfilled.

Blue Label Telecoms, which owns a 45% stake in Cell C, says its board has not been formally apprised of any of the details regarding the Telkom proposal.