Cell C is drowning in debt

For Cell C’s 13-odd lenders, which include most of South Africa’s banks, two Chinese banks and bondholders, the December 2019 and January 2020 default on one of Cell C’s bonds and a portion of its debt did not come as a surprise.

The lenders and beleaguered cellular operator have been in protracted negotiations to restructure about R8-billion of debt since mid-2019.

The company cannot pay the interest on its debt and it was clear that a default was pending. However, faced with the prospect of taking a haircut (a reduction in the value of its asset), negotiations with different lenders in different geographies, all with different and possibly competing objectives, have progressed slowly.  

Defaulting on the debt was a necessary evil to get the recapitalisation discussions over the finish line.

Since the twin defaults there has been no call by the banks on the debt, which suggests that none of the lenders want to see Cell C liquidated.  

“In the event of a liquidation, how much would the lenders retrieve? Almost zero,” says Philip Short, an investment analyst with Old Mutual Investments.

“Cell C’s key asset is its spectrum. It has a valuable spectrum, including 4G, but this cannot be sold and in the event of liquidation this would revert to Icasa. The spectrum is one of the reasons why Telkom was interested in acquiring Cell C.” 

The fact that Cell C spurned Telkom’s offer to acquire the company suggests that the equity holders thought they could do better, he says.

It is worth adding that its subscribers should also be considered an asset, but they are not because Cell C does not own its contract base. This is owned by shareholder Blue Label through a special purpose vehicle.

Despite being fierce rivals, incumbents MTN and Vodacom arguably also do not want to see Cell C fail as this will not be well received by the competition authorities, who may well see it as a market failure. 

It has been suggested that Cell C has not kept up to date with roaming fees owed to the two companies, which for the moment they are tolerating.

But one wonders just what plan Cell C CEO Douglas Craigie Stevenson is hatching.

His immediate priorities on assuming the position in August 2019, after acting in the role for five months, were to recapitalise the balance sheet and to sign an extended roaming agreement with MTN, as discussed in this article.

It would appear that he and his team have had some success in their negotiations with MTN. In November 2019, Cell C announced it had concluded a full roaming agreement (as opposed to its previous partial agreement) with MTN which will save it a significant amount in annual capital expenditure. 

“This should push the company from a negative cash flow position into a positive position,” Short says.

It is currently negotiating an extended roaming agreement with MTN which could see it selling its infrastructure to MTN and becoming a super virtual mobile operator.

This is obviously a good thing, but it will take more for Cell C to dig itself out of its R8.2-billion hole. 

As the late entrant in the market, along with Telkom, Cell C needed to be highly innovative if it was to compete with the giant marketing budgets and infrastructure spend (and squeeze) of MTN and Vodacom. Being cheaper and having catchy radio ads was never going to be enough.

While it succeeded in building a base of 13 million subscribers, the firm scored some own goals from the beginning. It signed a costly roaming agreement with Vodacom that took years to get out of. Infighting at the board level in the early days did not help, and the then-management made little attempt to learn valuable lessons from successful challenger networks in countries like Brazil and India. Other questionable decisions, as acknowledged by Craigie Stevenson in September 2019, did not help. 

In September 2019, Cell C finally published its annual results for the year ended May 2019, revealing a net loss of R8-billion for the period – which included R6.3-billion worth of impairments.

At that point, Cell C’s turnaround strategy was “focused on ensuring operational efficiencies, restructuring our balance sheet, implementing a revised network strategy and improving our overall liquidity,” Stevenson said at the time.

The business is clearly now being well run, but with an R8-billion debt burden it’s not enough and investors in parent Blue Label Telecoms (with a 45% stake in Cell C) or even Net1 (with 15%) will be wondering what the solution is. 

Blue Label is providing no clues. It issued a trading statement in January alerting investors to the fact that its headline earnings for the six months to November 2019 were likely to increase by 20%. It made no reference to Cell C beyond reminding investors that it had fully impaired its investment in Cell C for the year ended 31 May 2019, and as a result, the financial results of Cell C during the current period will not have an impact on its earnings.

Blue Label will report its results in February, at which point more light may be shed on Cell C’s future direction. BM