The Finance Ghost: Cell C stumbles towards financial sustainability

Competing against the biggest telecommunication networks is no joke. You just need to ask Cell C and the many investors who have lost money along the way. In the latest restructure of the balance sheet, creditors owed R7.3-billion had to accept a compromise offer of just R1.03-billion.

This is part of Blue Label Telecoms’s plan to recapitalise Cell C and finally achieve some degree of financial sustainability for the business. In addition to the steps taken to reduce overall debt, a subsidiary of Blue Label Telecoms will buy prepaid airtime for R1.2-billion from Cell C.

Sadly, Blue Label doesn’t have the best track record with anything outside of its core business. The share price is up 25% this year, which sounds great until you draw a five-year chart and notice a drop of more than 63%.

Investors have got plenty OUT

The “value unlock” trade by investment holding companies has been a feature of the post-pandemic market. Investors ran out of patience a long time ago with structures that give layered exposure to companies that are individually listed on the JSE anyway.

A structural “discount to intrinsic net asset value” is the only result here, as the layers create costs and complexities, and move investors further away from the assets. To close the discount, companies tend to unbundle their listed assets or sell off noncore unlisted assets. A recent high-profile example is the collapse of the PSG structure into the unlisted space.

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Rand Merchant Investment Holdings (RMI) unbundled major listed investments (Discovery and Momentum Metropolitan) and sold off its stake in Hastings. The value creation in the process is staggering. The market cap at June 2021 was R48-billion before these steps took place. After unbundling value worth R34.6-billion and paying dividends of R3.2-billion, the market cap a year later was R42.6-billion!

Going forward, RMI is becoming the OUTsurance Group. It will also hold a few small investments, but the bulk of the value clearly sits in OUTsurance, valued at R40.5-billion.

City Lodge’s story of recovery

City Lodge’s recent occupancy levels tell a story of recovery. In the 2019 financial year, average occupancy was 55%. In July to the first half of September this year, occupancies were between 52% and 56%.

You can also enjoy dinner at a City Lodge now. The group has had to evolve its offering to respond to consumer trends, which means less of a focus on being purely a bed-and-breakfast for business travellers.

Local corporates make moves in US

AngloGold already has operations in Beatty district in Nevada. This location is full of gold and they even have a stable supply of electricity, so AngloGold is happily investing in more properties for exploration purposes. The latest deal is a $150-million transaction that could increase to $200-million.

In California, logistics group Santova is acquiring 100% of A-Link Freight for $2.35-million. This is the company’s first move into the US market and it seems like a smart deal. Although the announcement is vague on the numbers, it looks like a deal based on a forward earnings before interest, taxes, depreciation and amortisation multiple of under 4x.

That seems like a solid entry point into the US market. We can only hope that both of those companies look back on these announcements one day with joy rather than regret. DM168

After years in investment banking by The Finance Ghost, his mother’s dire predictions came true: he became a ghost.

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R25.