Telkom eyes spluttering Cell C
Publish date: 20 November 2019
Issue Number: 1808
Diary: Legalbrief eLaw
Category: Telecoms
Partially state-owned Telkom has confirmed that it is in talks to take-over Cell C, which analysts said would likely receive overwhelming shareholder backing thanks to its potential to boost Telkom’s infrastructure. However, Legalbrief reports that there are strings attached, including a demand that the struggling company finalises its restructuring plan in order to address its R9bn debt burden. Cell C's range of products and services is supported by its network which offers 2G, 3G and LTE services. Cell C has almost tripled its customer base since 2012, acting as a disruptor and pushing for regulatory changes such as lower and asymmetrical mobile termination rates. A study commissioned by the National Treasury and conducted by the University of Johannesburg's Centre for Competition, Regulation and Economic Development found that the lower termination rates introduced in 2011 has saved SA consumers more than R47bn.
Telkom told investors it had substantially concluded its due diligence. However, a report on the IoL site notes that discussions were at a preliminary stage, and the potential acquisition would be subject to regulatory approvals. In a separate statement, on Friday Cell C confirmed that it had received a non-binding offer from Telkom. ‘Cell C remains focused on ensuring operational efficiencies, restructuring its balance sheet, implementing a revised network strategy and improving overall liquidity,’ it said. To get the deal approved, Telkom would likely need the buy-in of both its biggest investor, the government and Blue Label, which holds 45% of Cell C. Business Day reports that the Department of Communications & Digital Technologies said it has not been informed of the deal. ‘When such plans are presented, and based on the context, the Ministry will accordingly apply its mind,’ the department said.
On paper, at least, a deal makes sense, notes Hilton Tarrant in a Moneyweb analysis. He points out that Telkom would use its far superior balance sheet to buy a weaker rival, giving its mobile business instant scale. ‘Telecoms, as we know, is a scale game. With 27m subscribers, a combined operator will be better able to compete with MTN (28.9m) and Vodacom (43.9m). There are countless examples of markets around the world where four or five operators have consolidated down to three. But the problem is that Cell C is arguably in worse shape today than it was two years ago when Telkom tried and failed. Revenue and subscriber growth has flatlined – and earnings before interest, taxes, depreciation and amortisation (Ebitda) for the 12 months to end-May 2019 (aligned with the year-end of Blue Label Telecoms) was down 19%. In this period, Cell C’s net loss before tax was R3.8bn. The fundamental problem, even post recapitalisation, remains Cell C’s debt.'
Meanwhile, Cell C has signed a roaming agreement with competitor MTN, allowing its users to use MTN's network. Cell C’s previous agreement with MTN in 2018 allowed it to use MTN’s 2G, 3G and 4G network outside main metropolitan areas, but the new deal includes metropolitan areas as well. A Business Insider report notes that the deal extends Cell C’s coverage to over 95% of the SA population, and will be implemented from January 2020 over 36 months. Technology analyst Arthur Goldstuck said depending on implementation, Cell C users will soon have access to a much-improved service. ‘I think MTN realised it had lost out when it lost a roaming agreement with Telkom to Vodacom last year, and wanted to avoid Cell C also taking its roaming agreement to Vodacom,’ Goldstuck said. He said Cell C was simply unable to expand its network at the rate Vodacom and MTN did, and spent most of its cash resources repaying its debt, which means it was falling ever further behind.
Old Mutual analyst Philip Short believes Telkom may find itself having to pay much more for Cell C now that the agreement with MTN has been concluded. According to a Business Day report, Cell C and MTN said they had reached a 10-year deal that would give Cell C access to MTN’s network for voice and data services across SA. Short said it did not make sense for the proposed offer to have been made before the conclusion of Cell C’s recapitalisation – which would happen only after the extended roaming agreement was signed with MTN – as these factors would have a material effect on how much Telkom would have to pay for Cell C if the deal succeeded. Up to this point, the company was said to be worth zero, said Short. ‘As soon as they do an MTN roaming deal, then it’s worth a lot because they no longer have to do any more capital expenditure and a lot of their costs are removed, and then their subscribers continue to give them revenue, which now translates into positive cash flow,’ he said.
