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Urgent cash injection needed as Cell C debt spirals out of control

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Analysts paint a bleak picture of Cell C’s future, describing government policy position on cutting data costs and its failure to introduce 5G spectrum, as well as the telco’s lack of capital, as a toxic cocktail, which may lead to its total collapse.

Reacting to news that the embattled mobile operator has once again defaulted on the repayment of interest on its loans, analysts are of the view that Cell C is in a tight corner.

On Tuesday, Cell C’s largest shareholder, Blue Label Telecoms, announced to shareholders that Cell C had missed December’s interest payment on a $184 million (R2.7 billion) loan, as well as capital plus interest payments on loan facilities with Nedbank, China Development Bank Corporation, Development Bank of Southern Africa and Industrial and Commercial Bank of China, which were due last week.

“Currently, none of the bilateral loan facilities have been accelerated as note-holders are aware and support that Cell C is committed to resolving the situation by agreeing to restructuring terms with its lenders while it also continues to work proactively with all stakeholders to improve its liquidity, debt profile and long-term competitiveness,” it said.

Nesan Nair, senior portfolio manager at Sasfin, says there is “very little in my view” to save Cell C.

“There’s too many operators eating each other’s lunch. Government’s intention to escalate tariff regulation and their failure to introduce 5G spectrum makes it very difficult for operators to make margins, especially Cell C with its debt burden.”

Nair says Cell C’s debt is spiralling out of control due to interest arrears and there are now limited options to salvage the situation.

“Probably a combination of some kind of compromise with creditors (a bail in) and a rights issue/debt to equity conversion – similar to what Edcon did.”

Retailer Edcon, which operates the Edgars, Jet and CNA chain stores, agreed with creditors almost two years ago to convert the bulk of Edcon’s R26.7 billion debt into shares.

Nair, however, cautions that Blue Label may not have “the appetite for a rights issue. I really don’t know what they will do, but a combination with another operator must be on their minds.”

Cell C is on record as saying a merger not is an option, which may make Nair’s caveat a hard sell to the company.

In November, Cell C rebuffed Telkom’s overtures for a tie-up.

Peter Takaendesa, head of equities at Mergence Investment Managers, says: “Our view is that the chances of keeping Cell C as a going concern are now very low unless they conclude another capital injection over the next few months.

“The proposed operational restructuring and relying on MTN roaming are very dependent on Cell C strengthening its balance sheet, and benefits from those measures are likely to take time. The telecoms market in South Africa is now much tougher given a weaker economy, regulatory pressure and increasing competition. It is a very difficult market to implement a successful turnaround, especially for a company with a weaker balance sheet.”

Adding to Cell C’s troubles are the new recommendations on pricing by the Competition Commission. Last month, the Competition Commission threw a curve ball to SA’s leading telcos, MTN and Vodacom, recommending they reduce their mobile data pricing by half.

The competition watchdog, which has been investigating the cost of data in the country, presented its final report in December, which Nair believes will impact Cell C heavily going forward.

“They will not survive under the proposed pricing restructure,” he says.

Ofentse Dazela, director for pricing research at Africa Analysis, comments: “I don’t think without any substantial capital injection, which is required as a matter of urgency, that this mobile operator can be saved.

“If Cell C is to remain a going concern in the foreseeable future, current stakeholders in the company such as Blue Label Telecoms will need to play a more pronounced role to recapitalise the company, more so because talks with Buffet Consortium are seemingly not coming to fruition.

“The current trading environment for this operator offers little room to manoeuvre and it is now in a worse off position than ever before. Even the cost saving and expanded roaming agreement signed with MTN won’t be the panacea they are looking for, in my view.”

According to Dazela, the immediate goal for Cell C at this point is to source additional funding so that it can meet its debt obligations and cover other operational costs in the short- to medium-term to continue trading.

“If the current situation is not reversed quickly, then the inevitable shutdown of this operator will come sooner rather later.

“The majority shareholder either needs to go neck-deep and provide the kind of financial support that Cell C requires if they truly believe the current turnaround strategy will yield desired results, or they must just dispose of their majority stake for peanuts and completely dissociate the Blue Label brand with the mobile operator going forward.

“If these bold decisions are not taken, then Blue Label’s brand and share value will continue to suffer because of its exposure in the mobile operator.”

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