Levy brothers fall on sword for Cell C
Although they recently quit the Cell C board, the Levy brothers – Brett and Mark, who are joint-CEOs of Blue Label Telecoms – are taking responsibility for the mess at the mobile operator.
The joint-CEOs made the statement in Blue Label’s latest integrated annual report, saying: “Impairments, fair value downward adjustments and the group’s share of losses in Cell C negatively impacted our earnings by R7.5 billion.
“We accept responsibility for this poor performance and are determined to regain trust with our respective stakeholders. Our focus on the operating efficiency, speed to market and customer service within the core Blue Label business has resulted in a good performance relative to the South African economy.”
Blue Label’s investment in Cell C has not gone according to plan. The company acquired a 45% stake in Cell C in 2017.
Last month, Cell C reported a loss of R8 billion for the year ended May, a loss that pulled down Blue Label.
Blue Label has since written down the value of its investment in Cell C to zero.
The troubled mobile operator announced board changes last week, with the Levy brothers calling it quits. They were replaced by Gary Harlow and Jerry Vilakazi as Blue Label’s representatives.
“We both recognise that Blue Label’s share price has been under enormous pressure as a result of the market’s concern regarding Cell C’s ability to restructure its balance sheet and secure access to sufficient, reasonably priced funding to propel earnings growth into the future. Blue Label writing its investment in Cell C down to zero has compounded these fears,” the joint-CEOs say.
“We are confident that the conclusion of the extended national roaming agreement and recapitalisation transactions in progress will place Cell C on a path to sustainable growth into the future.”
Larry Nestadt, Blue Label’s independent non-executive chairman, also expressed unhappiness with the Cell C investment.
“This is the hardest chairman’s report I have had to write in my 25 years of serving on listed company boards,” says Nestadt.
He notes the board and executive management are acutely aware of the destruction of shareholder value caused primarily by the investment in Cell C.
“Together with Cell C’s trading loss and further impairment of its property, plant and equipment and an impairment of our own investment, Blue Label recorded a net loss related to Cell C of more than R6 billion.”
According to Nestadt, the investment in Cell C was motivated to the board, on the basis of a defensive strategy of protecting higher margin business flow received from Cell C, the ability to extract synergistic savings and an opportunistic approach to investing in a distressed asset.
“The board were, however, concerned by the quantum of our investment in Cell C. We were very aware that we might be betting the farm. Our concerns were overcome by the subsequent due diligence conducted by international experts, and the business plans and budgets presented by the then Cell C management team.
“Fairly soon after our investment of R5.5 billion in Cell C and a further R750 million liquidity support to the SPV [special purpose vehicle] structures, it became clear that the Cell C budget plan was not being met.”
Nestadt points out that this led to Blue Label’s re-examination of the business plan and budgets presented to it by the previous management team at Cell C, which had predicated the investment decision.
It was evident that further capital would be required far sooner than initially expected, he adds.
“This sequence of events led to an unusually high level of board oversight in support of the concerns of Blue Label’s executive management.”
Realistic business plans
Additionally, he says, the Cell C board conducted its own investigation, which led to the early termination of certain senior management contracts. A new management team has been appointed, and it has developed business plans that are more realistic and innovative. This turnaround strategy is starting to show encouraging results at Cell C, says Nestadt.
“The transactions related to Cell C regarding the extended national roaming agreement with the MTN Group and the recapitalisation by the Buffet Consortium, are progressing well and we are likely to provide further updates to our stakeholders during the remainder of the 2019 calendar year.
“The board is aware that the erosion of shareholder value as a result of the investment in Cell C has to be met by accountability and consequence by senior management. The board will initiate a management and board reset to restore the Blue Label core business focus.
“The balance sheet restructuring has already begun with the disposal of non-core assets to address gearing and liquidity management. In addition, we have adopted a far more conservative risk framework and revised capital allocation policy.”