Telkom is set to take another tilt at buying ailing mobile operator Cell C — but it’s a gamble it may soon live to regret.Just why Telkom may be taking another tilt at crisis-ridden mobile operator Cell C is anyone’s guess.
While Telkom hasn’t confirmed who it is targeting — the company simply said it was "in discussions in relation to a potential acquisition" this week — it’s an open secret that it has long sought to buy out what was supposed to be the challenger to Vodacom and MTN.
Paul Theron, founder of asset management firm Vestact, says he’d be "horrified" if he was a Telkom shareholder (he’s not).
"Anybody who has touched Cell C has lived to regret it," says Theron.
The Levy brothers, joint CEOs at Blue Label Telecoms, would probably agree. They burnt through R5.5bn in short order, trying to recapitalise the business after taking a 45% share in Cell C in 2017.
The Cell C investment has not only cost the company money, but has stripped Blue of almost all its market value.
Since the 2017 deal, Blue Label’s share price has slumped about 85%, from R19 in 2017 to just R2.87. Today the Levy company is worth less than it paid for its Cell C stake.
Yet Blue’s shares rallied 12% on Tuesday on the news, while Telkom’s stock — which has vastly outperformed bigger rivals MTN and Vodacom this year — gained more than 6%.
When asked about the deal, Telkom CEO Sipho Maseko said confidentiality clauses would not allow him to reveal its acquisition target, but added that the deal is "meaningful".
Nadim Mohamed, a portfolio manager at First Avenue Investment Management, says a Telkom-Cell C tie-up "actually makes a lot of sense".
For a start, Telkom gets access to more spectrum, Cell C’s tower assets and its 15.9-million customers.
"The thing about telcos is that they are typically scale businesses and have high capex, and that consumes your finances. You get to a ceiling at some point, at which point you have to start upping your capex," Mohamed says.
In other words, Telkom and Cell C, which don’t have the deep pockets of their larger competitors, Vodacom and MTN, "are going to have to invest a lot more to create capacity for the next round of growth", says Mohamed.
The problem is that, being No 3 and No 4 in the market, neither are at scale for the rollout of 5G, for example. "So when they join together there are a lot of synergies around operational spending and capex," he says.
In response to speculation, Cell C says it "remains focused on ensuring operational efficiencies, restructuring its balance sheet, implementing a revised network strategy and improving overall liquidity".
The operator confirmed that negotiations with MTN around a crucial roaming deal "are at an advanced stage".
Telkom’s results, out this week, highlight a rare success story in SA’s pantheon of poorly performing state-owned entities.
Group operating revenue of R21.5bn was 4.7% higher for the six months that ended in September, while earnings before interest, tax, depreciation and amortisation grew 12.4% to R5.6bn.
Much of that growth is due to its own mobile business, where revenue surged 56.6%.
"Our mobile business remains the fastest-growing business in the market, with market share gains underpinned by our affordable broadband-led propositions," it said.
Telkom, which runs SA’s biggest fixed-line telecoms network, has transformed itself under Maseko into a modern telecoms provider with heavy investments in its mobile phone unit.
It’s also capitalising on its extensive fibre infrastructure to sell internet services.
The partially state-owned company (the government owns 40%) spent R4.2bn on its mobile and fibre network "to support growth in the mobile business and to prepare for the accelerated upgrade of customers to LTE and fibre".
That has pushed debt up to R11.77bn, from R8.8bn in the previous comparable period.
Were Telkom to buy Cell C, it would also, presumably, have to take on the operator’s considerable gearing — R8.9bn at last count.
Cell C’s debt has hobbled the business from the get-go.
Telkom shareholders, for now, continue to reap dividends — 71.5c for the period, or 40% of interim earnings. But this may be affected in the future as Telkom prioritises capital expenditure.
Maseko, at the helm since 2013, has made internet data the cornerstone of Telkom’s strategy to take on MTN, Vodacom and Cell C. Presumably, having the customer base that Cell C brings would add further impetus to this growth.
What is likely to benefit all operators is the planned release of new spectrum, particularly the spectrum bands for 5G.
Vodacom Group CEO Shameel Joosub says SA’s largest mobile operator is excited about the prospect of having 5G rolled out.
Vodacom has been investing in its fibre network and towers for this purpose and bought Internet of Things player IoT.nxt.
Vodacom’s interim results, also out this week, showed a big jump in subscriber numbers: 2.7-million customers in SA and 2.7-million in its East African Safaricom business, bringing the total to 115-million for the six months to end-September.
Vodacom’s revenue rose 3.9% to R44.38bn and EPS were 19.4% better, flattered in part by last year’s one-off BEE costs.
The company declared an interim dividend of 380c, down 3.8% from the year-earlier period, though it also declared a special dividend of 60c a share.
Vodacom is the pick for Bloomberg Intelligence, which regards it as the clear leader in the SA telecoms sector, with "the best network and most customers".
Old Mutual Private Client Securities analyst Tasneem Samodien says its results signal "a potential recovery in the SA market following a spate of disappointing results over the past 18 months".
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