Telkom, a long-term suitor of Cell C, said on Tuesday it is in talks on an acquisition, sparking speculation that it is seeking to buy the debt-laden rival as part of its plan to break the stranglehold of mobile giants MTN and Vodacom.
Sipho Maseko, CEO of the landline operator in which the state holds a 40% stake, declined to expand on the company’s target, citing confidentiality clauses.
In its reaction, Cell C said that it was focused on "ensuring operational efficiencies, restructuring its balance sheet, implementing a revised network strategy and improving overall liquidity".
Bloomberg reported informed sources as saying Telkom made a bid for Cell C that will see it take over the management of the cellular provider and come up with a plan to cut its R9bn debt and renegotiate contracts with suppliers.
While Telkom increased its subscriber base to 11.5-million, it is still small relative to MTN and Vodacom, which together account for about three-quarters of the 98-million SIM cards in SA. A tie-up with Cell C would boost its subscriber base to more than 26-million.
A combination with Cell C would also help Telkom — which announced a 4.7% rise in group operating revenue to R21.47bn — cut costs and operate more efficiently, analysts said.
Strategic sense
"If the price is right, then Cell C makes strategic sense for Telkom because it would provide scale to the mobile business and benefits its other operations such as their towers, property and fibre businesses," said Peter Takaendesa, a portfolio manager at Mergence Investment Managers.
"Telkom needs to negotiate a very attractive price, given it is already aggressively gaining market share in mobile, and its balance sheet could gear up materially if they acquire all of Cell C’s assets."
Telkom’s share price surged on the news, jumping 6.68% to R66.14, its biggest gain in more than three years. It has risen 4.5% so far in 2019, giving it a market capitalisation of R33.8bn. In the same period, MTN’s share price gained 11.2% and Vodacom’s 2.5%.
This would not be the first time that the former state monopoly, which is seeking to reduce dependence on fixed-lines, has made a bid for Cell C.
Telkom’s initial attempt in 2017 failed after Cell C went for a recapitalisation plan led by Blue Label Telecoms in a deal that cut its debt by two-thirds to less than R6bn. That rescue proved to be disastrous for Blue Label as the cellphone operator failed to make inroads against bigger rivals MTN and Vodacom. The company blamed Cell C’s losses and debt for its R6.6bn loss, more than double its market capitalisation of about R2.6bn.
The share price of Blue Label, which holds 45% of Cell C, rose 9.3% on Tuesday, reducing the 2019 drop to 48%.
Old Mutual analyst Philip Short said synergies for Cell C and Telkom included the potential to share spectrum, where they have different allocations.
"Spectrum is quite a scarce commodity." Spectrum refers
to the radio frequencies that carry voice and data signals on
a network.
Earlier in November, regulator Icasa surprised the industry by kicking off the 5G licensing process, as well as publishing detailed proposals on how five bands of new 4G spectrum will be licensed.
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