Investors in the dark over Cell C crisis

JSE investors, this time shareholders of Blue Label Telecoms, have got the short end of the stick once again.

Shareholders in the teetering telecoms company are understandably fuming after Blue Label failed to announce to the market that its most costly asset, the chronically loss-making telecoms operator Cell C, had missed a debt repayment in July.

Technically, that means Cell C is insolvent, which prompted ratings agency S&P Global to last week downgrade Cell C to "default".

Inexplicably, it took Blue Label until Monday to issue a Sens statement to the market to that effect. When pressed, investor relations head Nicola White said: "We just thought it prudent."

Investors hoping for some censure from the exchange are likely to be disappointed.

The JSE’s GM of issuer regulation, Andre Visser, says merely that "we are still in the process of engaging with the company".

"What does that mean?" asks veteran stockbroker, Sasfin Securities’ David Shapiro. "Can they pay their debts or not? Are they a going concern and will the auditors right now attest to that?"

Blue’s failure to communicate with shareholders, says Shapiro, means any potential buyer of the stock is doing so blind.

"What protections have you got for the people buying the shares now?" he asks. "Are they apprised of all the information? Or are there risks in the background that we don’t know about that are not being declared?"

The state of Blue’s finances is anything but clear. It recently delayed the release of its financial results for the year ended May, saying it was "in the process of determining the valuation of its investment in Cell C, incorporating the effects of the transactions currently in progress".

Those transactions include a potential cash injection from the white-knight Buffet Consortium, led by reclusive billionaire Jonathan Beare.

Ostensibly, the consortium has agreed to take a minority stake in Cell C that will bolster the mobile operator’s balance sheet, but the deal — first proposed in February this year — has still not been finalised.

Uncertainty over Cell C and its drip-feed of information to the market have cost Blue Label dearly: its share price, at Tuesday’s R2.65, is now below the company’s 2007 listing level of R8.60 per share. That means its market capitalisation of R2.2bn is about R3bn less than the R5.5bn paid by the company for its 45% stake in Cell C in 2017. According to Cell C financial statements to the end of December 2018, it owes about R8.7bn to a number of lenders including the Development Bank of Southern Africa, Nedbank, Investec and Absa.

While Cell C pulled in R15.7bn in revenue, it made a loss of R1.27bn for the same period.

In June, S&P had downgraded Cell C for the second time in less than three months to reflect that a default was "a virtual certainty". This came after the network operator delayed some repayments on a R1.4bn airtime-backed facility.

So what should Blue Label investors, in the dark about both Cell C and the original Blue Label prepaid business, do?

Peter Takaendesa, portfolio manager at Mergence Investment Managers, says if there’s no wrongdoing in the case of Cell C’s business practices, it may be better for shareholders to hang onto their investment in Blue Label for the long term. Takaendesa argues that Blue cannot afford to let Cell C fail, given that, in addition to owning a stake in the business, it is a distributor of prepaid airtime for the operator too.

Fresh funding is, however, critical.

While SA’s third-largest operator has tended to compete on lower prices, "without funding, Cell C can’t afford competitive capex which will allow it to reduce pricing in line with competitors," says Ruhan du Plessis, analyst at Avior Capital Markets.

He says Cell C will have to become more reliant on lower-margin roaming from MTN. Cell C already uses MTN’s network in areas where it does not have coverage. Cell C previously roamed on Vodacom’s network but switched to MTN in late 2018, an agreement which was expanded in early August.

For its part, S&P says: "We believe there are still various steps that need to be completed prior to recapitalisation, including the signature of a binding long-form agreement with MTN Group ... shareholder and regulatory approvals, and the restructuring of bilateral facilities."

In a statement, Cell C CEO Douglas Craigie Stevenson said: "We are committed to simplifying the business model, rightsizing and optimising the business. We have engaged with S&P throughout this process and believe we are on the right track with the transactions currently being finalised."

Blue’s bet on Cell C polarised analysts from the outset. Strategy Worx CEO Steven Ambrose says the local telecoms pie was simply too small for SA’s third-largest mobile operator to compete effectively.

He argues that part of the problem is a very mature market. For example, in a country with 58-million people, the top two operators (MTN and Vodacom) have more than 70-million subscribers between them.

While Cell C’s travails have overwhelmed Blue Label’s other operations, the company continues to invest in new ventures. In July, Blue said it had bought 26% of Cape Town-based sports technology start-up, Mobii Systems. Blue’s founders, brothers Brett and Mark Levy, are avid rugby supporters and Mobii specialises in timing software for sporting events. Its developers built the backbone for rugby match analysis on the Stratus platform, used by the Springboks, which gives teams, managers, coaches, medical personnel and referees the data, tools and insights to help them plan their strategy. But until Blue begins to disclose what is happening within its business, its own long-term game plan will be anything but clear.