Analysts warn of Cell C strain due to prolonged recap deal

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As negotiations to recapitalise the financially-strained Cell C continue, analysts warn that further lengthy delays in injecting fresh capital will make it difficult for the operator to remain competitive.

The analysts were reacting to Monday’s caution to shareholders by Blue Label Telecoms, which holds a 45% stake in the mobile operator, saying it remains in talks about a recapitalisation of Cell C.

Blue Label announced in August that it had concluded a term sheet for an airtime purchase transaction with Investec, Rand Merchant Bank for the recapitalisation.

The recapitalisation of Cell C has been on the cards for some time, as shareholders continue to engage with potential investors.

“As much as a recapitalisation may be necessary to sustain the business in the short- to medium-term, ultimately, the business, any business in fact, needs to be profitable to be commercially viable for shareholders,” says Nesan Nair, senior portfolio manager at Sasfin.

“There isn’t much information from the company as to its plan on how it’s going to be profitable. Sure, we know they want to get market share, but I still don’t see how that necessarily translates to profitability.”

Peter Takaendesa, head of equities at Mergence Investment Managers, points out the current Cell C management team “has done very well to keep the lights on for now, but the business will find it increasingly difficult to sustain its operations if the recapitalisation faces a lengthy further delay”.

“The management team has significantly cut operating costs and reduced capital expenditure over the past 18 months to limit the crippling impact of the funding constraints. However, the costs of the recapitalisation process alone largely offset most of the benefits of the restructuring process and management will find it increasingly difficult to keep cutting costs, as all low-hanging fruit has largely been harvested,” he says.

Moreover, Takaendesa notes: “Recapitalisations of companies are always complicated, especially when you are dealing with stakeholders from different jurisdictions, as in Cell C’s case.”

While the operator has been waiting for fresh capital, it has remained focused on its turnaround strategy, which includes ensuring operational efficiencies, restructuring the balance sheet, implementing a revised network strategy, and improving overall liquidity.

The telco, led by CEO Douglas Craigie Stevenson and CFO Zafar Mahomed, has also been advocating for infrastructure-sharing, saying it would rather be focusing on being customer-centric, as opposed to being network-centric..

“Cell C’s new operating model of relying more on competitors’ networks will result in capital expenditure reduction for the company, but roaming costs will increase significantly going forward,” says Takaendesa.

“There is more value to be extracted from allowing MTN and Vodacom to use Cell C’s spectrum for now, but it’s not clear how the economics will change if and when the big operators get their hands on new spectrum over the next few years.”

Nair questions the viability of the plan, saying: “As far as infrastructure-sharing is concerned, one cannot put one’s strategy for profitability on a regulatory change. I’m sure there are many investors out there asking the same questions.”

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