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Fresh blow for Cell C as shareholders re-evaluate positions

Samuel Mungadze
By Samuel Mungadze, Africa editor
Johannesburg, 20 Sept 2019
Herman Kotzé, CEO of Net1.
Herman Kotzé, CEO of Net1.

Cell C suffered a fresh blow yesterday, after two of its shareholders were forced into a write-down of value in the telco.

First was Blue Label Telecoms, the largest shareholder in Cell C, issuing an updated trading statement informing the markets it is impairing its Cell C investments to nil for the year ended 31 May.

The news got even worse during the day, when Net1 UEPS Technologies, which holds a 15% stake in Cell C, also issued a statement, saying it “believes the fair value of Cell C at 30 June (Net1’s fiscal year end) is nil”.

The company added it expects to record a non-cash fair value adjustment to reduce its carrying value in Cell C to zero.

“The decisions of Net1 and Blue Label to write down the value of their respective equity holdings do not impact Cell C’s operations, DNI’s distribution capabilities or the proposed transactions being pursued by it,” said Herman Kotzé, CEO of Net1. “We believe Cell C’s long-term prospects will significantly improve once it has been recapitalised.”

Telecoms analyst, Derrick Chikanga from Africa Analysis, says: “The reduction is a further indication of the current financial difficulties Cell C finds itself in.”

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

The operator has been downgraded three times by global rating agency Standard & Poor’s.

Further, Chikanga says the move by shareholders, particularly Net1, “could be interpreted as an attempt, by Net1, to completely disassociate itself from Cell C in order to limit the ripple effect of Cell C’s financial problems on its own balance sheet”.

He points out: “Cell C could find itself in a difficult position with regards to raising future capital to turn around its current financial situation.”

Chikanga believes the future of Cell C remains uncertain and only extreme measures could rescue the business.

“This restructuring by Net1 probably means no future capital will be injected by the organisation into Cell C operations. Hence, Cell C will experience operational difficulties if no measures are put in place to rescue the organisation.”

Investment analyst, Peter Takaendesa, portfolio manager at Cape Town-based Mergence Investment Managers, says the move by shareholders doesn't mean Cell C operations will stop.

“The Cell C numbers included in BLU's trading update show the business is under pressure and it is clearly not sustainable in its current form.

“Writing it to zero is the right thing for now given further weakness operationally and high debt on its balance sheet. The operations themselves are not worth zero as there are good assets, including spectrum, but the key question is what remains for shareholders after paying off debt.

“It is difficult for regulators to get involved in that sense at this stage as the company has indicated it has initiated restructuring plans and is in discussions with various parties to de-risk the business.

“If they can negotiate a good roaming deal with MTN and raise new equity funding at the same time, then there is potential for Cell C to recover in a different business model.”

Chikanga, however, believes it’s time Cell C seeks urgent help.

“Cell C could consider applying for business rescue. The company could apply for a rescue package to avoid total bankruptcy.

“It can also consider selling either the entire going concern or certain assets. Potential buyers may only be interested in some assets; for example, the subscriber base or some of the infrastructure.

“However, in case of a sale, the current shareholders will likely lose part of their investment. But this will be a case of cutting your losses and getting something out now rather than less later.”