PREPAID technology specialist Blue Label Telecoms, which services mainly the mobile phone and prepaid electricity segments, surprised the market with an intriguing twist to its proposed acquisition of a strategic stake in Cell C, SA’s third-biggest cellular services operator.
Although a possible transaction was first made public at the end of 2015, a finalisation announcement on Wednesday made provision for Blue Label to secure a markedly bigger strategic stake in debt-laden Cell C and for the introduction of payment solutions technology company Net1 UEPS as a significant minority shareholder in Blue Label.
The deal could be a game changer in the mobile phone market, but Lentus Asset Management chief investment officer Nic Norman-Smith said there would inevitably be questions around whether buying the smallest cellular operation in SA would give Blue Label the desired operational leverage.
Blue Label joint CEO Brett Levy stressed the company was confident the Cell C transaction would add the additional revenue streams to justify the investment.
"When you make R5.5bn investment as a company with a R13bn market capitalisation, then you are 150% sure of the deal."
Alpha Wealth small-cap expert Keith McLachlan said there were also concerns that the Blue Label-Cell C deal could make larger competitors Vodacom and MTN more skittish. "It’s binary. Either they are skittish or they are not."
Levy said although Blue Label now had an anchor tenant in Cell C, it was still business as usual with MTN and Vodacom.
"We still have a lot to offer the local cellular market. We remain a neutral aggregator of all telecoms products," he said.
The terms of the deal will see Blue Label injecting R5.5bn into Cell C for a 45% stake. The initial proposal pitched a R4bn capital injection in exchange for a 35% stake in Cell C. Analysts estimated the new deal terms valued Cell C at about R12.5bn, which is significantly smaller than SA’s two biggest cellular companies, MTN and Vodacom, which hold market capitalisations of R212bn and R228bn, respectively.
But the inferred valuation is higher than the initial R11.4bn that was placed on Cell C when Blue Label first confirmed its intentions to recapitalise the business. It will fund R3.5bn of the transaction from existing cash and borrowings. But an unexpected development saw R2bn raised by placing new Blue Label shares at R16.96 per share with Net1 — a company that might be viewed as a rival.
Net1 will subsequently control about 15% of Blue Label.
McLachlan said Net1’s participation in the Cell C deal was intriguing in terms of capital allocation. "It is significant that Net1 has put R2.5bn into Blue Label rather than its own operations."
A key issue debated by market watchers was whether the implied higher valuation for Cell C meant that SA’s third-largest cellular services provider was gaining traction in its efforts to secure sustainable viability. The key figure disclosed in the announcement was that Cell C’s debt will fall to about R8bn.
Levy confirmed there would be fulsome disclosure around Cell C’s financials in the coming deal circular.
"At ebitda [earnings before interest, tax, depreciation and amortisation] level, Cell C is very profitable. The history of the company is not so important in this transaction, but the restructuring of the balance sheet is. "It is simple, Cell C is a business with too much debt. If you bring the gearing down, you have a really good business," Levy said.
Since 2012, Cell C has increased its subscriber base from about 9-million subscribers to more than 25-million.
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