Debt-ridden Cell C admits to ‘misguided strategy’
Cell C has laid bare the challenges bedevilling the carrier, saying the biggest obstacles were brought about by own goals, including a misguided business strategy, and a recapitalisation programme three years ago which burdened the business with unsustainable debt.
The company, however, believes in long-term prosperity, and says it new leadership team is focused on the journey to turn it into a profitable entity.
Responding to analysts who painted a bleak picture of Cell C’s future, saying its debt and lack of capital are a toxic cocktail, which may lead to total collapse of the telco, CEO Douglas Craigie Stevenson says improving the telco’s liquidity and debt profile requires a complicated and delicate restructuring.
“While a new recapitalisation is being negotiated, there is an informal debt standstill and debt payments have been suspended.
“Our turnaround strategy is focused on ensuring operational efficiencies, restructuring our balance sheet, implementing a revised network strategy and improving our overall liquidity.”
Cell C says a number of factors give a fuller and more balanced perspective to the recent news around its debt payments.
Cell C’s largest shareholder, Blue Label Telecoms, recently 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.
Last week, analysts told ITWeb that urgent cash injection is needed.
Nesan Nair, senior portfolio manager at Sasfin, said 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.
Moreover, Peter Takaendesa, head of equities at Mergence Investment Managers, is also of the view that: “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.”
Now, Cell C says although its lenders are entitled to call up the entire debt owed, they have not accelerated debt payments and have held off on taking enforcement action in order to facilitate a commercial solution.
“The non-payment is not a surprise to lenders that understand the Cell C turnaround strategy,” it states.
According to Craigie Stevenson: “In addition to the restructuring of the debt, there has been significant investor interest, which validates there is indeed value in the business.”
This value, he notes, includes its nearly 16 million subscribers, a distribution network of over 240 stores countrywide, and a strong brand that has been recognised as one of the top 30 valuable brands in the country.
Craigie Stevenson says Cell C has a real opportunity to address its historical performance through a focus on operations.
“The company has taken active steps to reduce its focus on pure revenue and subscriber growth to focus on profitable, long-term growth. The positive impact of these initiatives will be backed up with the release of the company’s financial results in the coming weeks.”
Furthermore, Craigie Stevenson says Cell C is in a far better shape operationally and “by fixing the base, the business can go on to build and innovate, which will create additional value”.
He says the third pillar of the turnaround strategy is a revised network strategy.
“Networks will be a utility in the future, with one or two mobile infrastructure providers per country, and it does not make economic sense to overbuild on basic infrastructure. Against this background, in November 2019, Cell C negotiated an extended roaming agreement with MTN, which will enable the company to manage its network capacity requirements in a more scalable and cost-efficient manner. This will also provide access to current and future technologies,” Craigie Stevenson explains.
Notwithstanding the progress in his turnaround strategy, Craigie Stevenson cautions the financial strategy through recapitalisation remains to be resolved.
He says the focused company strategy and correctly capitalised balance sheet will lead to better leveraging of assets.
“There is belief in Cell C’s long-term prosperity, and the new leadership team is focused on the journey to turn the company into a profitable, innovative player in the local telecoms industry and is confident the organisation is fully geared to overcome its challenges. Earnings are up, margins are stabilising and there is a ruthless approach to cutting additional costs out of the business. A recharged Cell C is being built that creates value for its stakeholders.”