Blue Label Telecoms’ decision to buy Cell C has destroyed billions in shareholder value, but it has not deterred the company from pumping more money into the mobile operator.

Blue Label’s journey with Cell C started in August 2017 when its wholly-owned subsidiary, The Prepaid Company, acquired a 45% stake in the mobile operator for R5.5 billion.

At the time, Blue Label co-CEO Brett Levy said they were positive about a turnaround in Cell C’s financial and operational performance.

Levy dismissed criticism from analysts like Vestact CEO Paul Theron, who warned that getting mixed up with Cell C was akin to “grabbing an anchor and jumping off a pier”.

He said the critics did not understand what they were planning with Cell C, which included launching a video streaming service called Black.

Unfortunately, the critics were right. Cell C’s financial and operational problems continued, and it had to shut down Black because of poor performance.

The Cell C debacle caused Blue Label’s share price to plummet from R21.00 to R3.51 per share, destroying R16 billion in shareholder value.

Levy initially criticised investors for not appreciating “Cell C’s compelling growth prospects” but eventually conceded Cell C was a bad investment.

Cell C’s financial situation deteriorated to a level where it had to delay its debt payments and hire consultants to probe its business practices.

On 31 May 2019, Blue Label impaired its investment in Cell C to nil.

Cell C remains valuable to Blue Label

Although Blue Label impaired its investment in Cell C to nil, the mobile operator remains important to the company.

Cell C is one of the main revenue and profit drivers for Blue Label — both through airtime sales and other products.

Airtime sales in South Africa are the foundation of Blue Label’s business and account for a substantial portion of its revenue and profit.

The volume of prepaid airtime sales from Vodacom and MTN subscribers is much larger than from Cell C.

However, Blue Label makes a much larger margin on airtime sales from Cell C, which makes it a significant contributor to profits despite low volumes.

Another revenue driver for Blue Label is prepaid and postpaid SIM cards, which generated R635 million for the company in the last financial year.

Blue Label’s relationship with Cell C is vital to continue distributing these SIMs and making a good margin on them.

Blue Label also makes money from Cell C’s postpaid base through the Comm Equipment Company (CEC).

Blue Label previously said strong collections and better deal structures from Cell C have led to an improved book for CEC.

Blue Label’s relationship with Cell C is therefore important for CEC’s success and growth prospects.

Two years ago, Levy said Cell C made up around 25% of Blue Label’s profits. “If Cell C had to close their doors, we would lose between 20% and 25% of our profit,” Levy said.

Whether these figures have changed over the last two years is uncertain, but Cell C definitely remains a significant revenue and profit driver for Blue Label.

Saving Cell C

Blue Label created a recapitalisation programme to save Cell C, which included secured lenders taking an 80% haircut on their debt.

The debtors voted in favour of the debt restructuring, which saw secured lenders accepting a 20c claim to the rand.

Blue Label expected the Cell C recapitalisation transaction to be concluded by late July 2022. However, on 1 August, it notified shareholders that it had been delayed.

“Although the final stages of the recapitalisation process are progressing well, delays have resulted in the transaction being expected to close towards the end of August 2022,” it said.

To conclude the recapitalisation transaction, Blue Label, through The Prepaid Company (TPC), will lend Cell C R1.03 billion to pay the “20c to the rand” claims from secured lenders.

To further assist Cell C with working capital, TPC will purchase R2.4 billion in prepaid airtime from Cell C.

TPC will also purchase certain minimum levels of prepaid airtime from Cell C per an agreed monthly schedule.

Following these transactions, Blue Label, through TCP, will hold approximately 49.3% of the shares in Cell C.

It raises the question of whether Blue Label is merely repeating past mistakes with Cell C and throwing good money after bad.

Levy dismissed these concerns, telling Business Day they have fixed its balance sheet over the last two to three years. “We can get into whatever we want as a company,” he said.

He added that if they did not believe in Cell C, it would have been easier to simply move on.

However, Levy said it would be silly to pass on the enticing synergies between Blue Label and Cell C. “Blue Label with Cell C is going to be a very powerful combination,” he said.

Daily Investor asked Blue Label why it believes things with Cell C will be different this time, but the company did not answer this question.

It also preferred not to discuss its strategy with Cell C and how it plans to grow the mobile operator.

Daily Investor asked Cell C how it would turn the company around and create positive net equity. However, it preferred not to answer questions before the recapitalisation process had been completed.

In a trading statement on 18 August, Blue Label informed shareholders it expects to report a 34% to 38% increase in headline earnings per share next week.

Its share price traded slightly higher on the day and was at R7.10 at the time of publication.