To say Blue Label believes in Cell C would be putting it mildly.
After writing off its widely panned R5.5bn investment in 2019, Blue Label Telecoms is once again ready to back the mobile operator with more money through a bond process, set for a vote on July 5.
“Everyone thinks we’re throwing good money after bad,” Brett Levy, Blue Label co-CEO with his brother, Mark, tells the FM. But, he says, “that’s the immaturity of people who want to make a big story out of nothing. Blue Label has over the past two to three years fixed its balance sheet. We can literally get into whatever we want to as a company.”
He adds: “If we didn’t believe in Cell C it would be easier to … move on. Yes, we would lose some short-term money, but the world of building businesses is long term.”
Yet Blue Label’s insistence on standing by the mobile operator, in which it bought a 45% stake in 2017, is the key reason many in the market have abandoned the once promising provider of prepaid airtime, electricity and ticketing. Blue Label’s shares peaked at R21 in October 2016, but now languish at R5.70. Over five years, the shares have returned a negative 61.7%.
Everyone thinks we’re throwing good money after bad. That’s the immaturity of people who want to make a big story out of nothing
— Brett Levy
Cell C, meanwhile, has struggled to make a profit since it launched in 2001. It’s laden with long-term debt of R8.7bn.
Levy himself called the investment a bad one in a 2019 interview. “I think, in hindsight, of course, it has been a bad investment. Our share price speaks for itself,” he told CNBC at the time. Not that it hasn’t hurt the Levy brothers, either. Between them they own 11.3% of the company.
The sheer length of time it’s taken to recapitalise Cell C may be another reason for investor apathy. Bondholders, creditors and advisers all had to agree to the terms, which were finally wrapped up in March.
Independent analyst Philip Short says: “The market is taking a wait-and-see approach for the recap to be formally concluded before re-evaluating an investment in Blue Label.”
As part of the complex R7.3bn recapitalisation, Blue Label will lend Cell C just over R1bn, which will be used to pay 20% of claims by secured lenders. In other words, lenders will receive 20c for every rand owed. Lenders looking to stay invested will lend a further amount to Cell C in exchange for new shares. This arrangement will increase Blue Label’s shareholding to 49.3%.
To give Cell C more liquidity, Blue Label will then buy prepaid airtime worth R2.4bn from the mobile provider, while deferring a R1.1bn loan repayment owed to it. Part of the funding for the airtime purchase will come from lenders that have already approved lines of credit to Blue Label.
It’s not clear at this stage whether Net1, which recently changed its name to Lesaka, will hold on to its 15% stake in Cell C once the recapitalisation is done.
So will this second swing hit the target? The Levy brothers maintain that the potential synergies with Cell C are too enticing to pass up. Levy says they have their reasons for continuing to support a business that has been written off by almost everyone.
“The first fundamental is that we believe in this business 100%. A Blue Label without Cell C will be strong, and has a great future. But a Blue Label with Cell C is going to be a very powerful combination,” he says.
As a supplier and distributor to mobile operators, having a network operator in its portfolio has given Blue Label leverage it previously did not have, he says. “Why did we buy Cell C? It was very defensive for Blue Label. We have a strong relationship with the other networks. But now that we have our own network … there’s no bullying involved.”
The second reason is what Levy calls “the first right of refusal with each other”.
“The stuff we do and the stuff a network does intertwine and complement each other tremendously. The whole intention of the first deal was to become a supplier and a customer to each other. This is very big.”
He says: “If you go to the networks world of procurement, it’s billions of rands. And if we can give Cell C the same product better and cheaper, Cell C saves hundreds of millions of rands.”
Short appears to agree. Cell C’s collapse would have hurt Blue Label badly given that, as a prepaid airtime customer, it generates about 25% of Blue Label’s profits.
Blue Label is set to more than recoup its initial investment in Cell C, while having an increased shareholding in a business that will be free cash flow positive and have some very valuable assets
— Philip Short
Says Short: “Looking at Cell C’s profits and balance sheet post the proposed recap, Blue Label is set to more than recoup its initial investment in Cell C, while having an increased shareholding in a business that will be free cash flow positive and have some very valuable assets. These are spectrum, a large and profitable subscriber base and a Cell C that has a R20bn accumulated loss — a deferred tax asset.”
Short believes Blue Label could enjoy “significant” upside after the recapitalisation.
Cell C itself has changed tack over the years. It’s shifted away from owning and operating its own network infrastructure in favour of roaming agreements with MTN and Vodacom. The company uses its own spectrum through network towers operated by the larger players, and it took part in the recently held spectrum auction.
Cell C CEO Douglas Craigie Stevenson has, for years, chosen to say little about the recapitalisation before its finalisation, but maintains that the operator is well placed to take advantage of growth opportunities with the right capital structure.
Yet the mobile landscape has changed irrevocably since Cell C entered the fray. SA’s bigger players argue that the market doesn’t have room for a multitude of players any more, particularly in the light of a 5G future.
For example, Vodacom and MTN spent R10bn every year over the past decade on 3G and 4G networks.
“Even four-player markets [aren’t] sustainable in a country, not just SA. There’s not enough of a profit pool for people to get the right return,” MTN CEO Ralph Mupita told a PSG event earlier this year.
Levy concedes that Cell C has to play its game differently. “Cell C has a place in this market. It will never be a Vodacom or an MTN, and I don’t want to compare it to [our] first strategy. We got it wrong; we were trying to build our own network. The execution was all wrong.” Levy says Cell C won’t spend any more money on “hard capex”.
The usual mobile services aren’t enough to cut it any more either. Consider the push that both Vodacom and MTN have made into financial services. It’s unlikely that the smaller Cell C, or even Telkom, will be able to effectively make the switch.
David Lerche, head of equities at Sanlam Private Wealth, says fixing Cell C’s core voice and data business should be the focus of management. The company has operations only in SA, which leaves little room for exploring new revenue lines in financial services like the bigger players.
“Neither Telkom nor Cell C is likely to succeed in the financial services space. Even Vodacom and MTN’s financial services businesses are far more successful outside SA than in their home market.”
As for Cell C’s place in a saturated market, Levy says: “Can we go from a 10% to a 20% market share? No. Not in its current form. But can we go from 10% to 15%? Absolutely. Because we do have a value add — we have a brand and a position that add value in the MVNO [mobile virtual network operator] market.”
Cell C is the largest provider of MVNO services in SA; operators such as FNB Connect, Standard Bank Mobile and Mr Price Mobile all use its network to offer mobile services to customers.
“The lower-end customers on prepaid are not getting the absolute best deal from Vodacom and MTN. They still get a better deal from Cell C,” Levy says.
Evidently, Blue Label has crunched its numbers. But only time will tell whether this leap of faith really is worth R10bn.
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