Blue Label moves to reassure market on Cell C

As Blue Label’s share price on Wednesday fell to the same level as its debut price on the JSE 11 years ago — R6.75/share — the company’s management team has moved to assure the market that its acquisition of 45% of Cell C was not only well thought through but will deliver the expected returns.

Blue Label plunged more than 10% on Wednesday after it published its results for the year ended 31 May 2018. This came on top of an 8% decline on Tuesday after Cell C published its interim results for the six months to 30 June 2018. Blue Label’s share price has fallen precipitously this year — by more than 50% — in large part due to investor anxiety over Cell C’s prospects.

But at a media briefing on Blue Label’s full-year results on Wednesday morning, co-CEOs Brett and Mark Levy moved to reassure investors that the acquisition makes sense.

Blue Label’s core headline earnings were R1.03-billion, up 30% on a year ago. Core headline earnings per share rose by 4% to 120.61c. Its 45% shareholding in Cell C contributed R569-million to core headline earnings. This included the recognition of the group’s share in a Cell C deferred tax asset of R1.92-billion. The 3G Mobile and Airvantage acquisitions added R157-million and R2.6-million to core headline earnings respectively.

Though revenue rose by only 1%, Mark Levy said the company has shown the ability to “weather the storm”. “Our revenue increased by 1%, but that’s not the true story of Blue Label,” he said. If Pin-less top-ups are included, revenue grew by 9%. “To get 9% growth in our market has been extraordinary.”

Gross profit, he said, grew by 7% to R2.28-billion, while the board has approved a share buyback programme to take advantage of the depressed share price.

“The acquisitions (Blue Label made in the past year of Cell C, 3G Mobile and other companies) were very deliberate and designed to complement our core business model.”

Brett Levy said Blue Label put “a lot of thought and process” into the R5.5-billion Cell C acquisition. “We didn’t buy it because we had to buy it, we didn’t buy it because we felt like another asset — we bought it because we thought it could add tremendous value.”

‘Strong’ third player

He said “every single line item” — from budgeting to business planning — at Cell C has been surpassed in eight months since the deal was consummated. “We are up on every single line item.”

He said Cell C is positioned for growth as a “strong” third player behind Vodacom and MTN and that it won’t engage in a price war with its bigger rivals, adding that the mobile operator’s business model rests on five pillars.

The first is the traditional telecommunications business of providing voice and data. Here, it is not chasing the same Ebitda (earnings before interest, tax, depreciation and amortisation) levels as Vodacom and MTN, he said. “We are coming from the bottom up.”

The second pillar involves building a strong wholesale business by acting as a platform for mobile virtual network operators (MVNOs) and Internet service providers (ISPs) that want to resell its products.

In MVNOs, Cell C is “number one by a long shot”, Levy said. “Today, Cell C has 64 MVNOs on its network. This division grew by 51% and is growing rapidly. The MVNO market in South Africa is a massive market… It’s only beginning. We signed Afrihost and Internet Solutions; these are massive clients with massive databases. Our wholesale division is growing tremendously.”

The third focus area is fibre to the home, where Levy believes there is strong potential for growth. “Cell C is the number two (ISP) in the country for FTTH. Where in the world is South Africa in fibre? It hasn’t begun. There are still hundreds and hundreds of thousands of homes to go to… We will play a massive role in FTTH in South Africa.”

Cell C’s focus on developing a content platform through its Black offering is the fourth key pillar. “If you think a network can survive without content, you have to just look around the world. A network cannot be a network without content. They are converging and it’s happening quickly… This is a long-term play. It doesn’t happen overnight. We have capacity on the network and the spectrum (to do it).”

The fifth pillar is the roaming agreement Cell C recently concluded with MTN, which Levy described as “a very impressive deal”. In time, he said, “everyone will understand exactly what this is. Today, before the roaming deal, we had a very good deal with Vodacom. We now have seamless handover with 4G (on MTN)… By the end of November, Cell C will have 80% coverage on 4G.” He said the roaming deal with Vodacom won’t be renewed when it expires in 18 motnhs’ time.

“All this makes us a very serious third network. We are not trying to fight with MTN and Vodacom. We are not trying to have a capex war with them. In the next one to two years, you will see the results… We are not in a fight to subsidise phones on post-paid. It’s not our model. We can’t afford it. This is the new Cell C. We don’t need to chase that business. We want greater margin… When we do a post-paid contract today, it’s profitable. We are chasing turnover that is related to profit.”

He denied a suggestion that Cell C still has an unmanageable debt problem.

Following Cell C’s recapitalisation, its long-term debt was R6.4-billion at the end of June, down from R17.9-billion a year ago. However, short-term debt rose to R1.5-billion from R417-million previously. Debt related to leases was R5.5-billion, up from R5.1-billion. Net debt including leases was R12.7-billion, down from R23.3-billion. Total interest payments in the half-year amounted to R952-million (previously R1.1-billion).

New debt facility

Cell C raised a new rand-denominated debt facility of R1.4-billion following its half-year results and said it is in the process of raising another R1.4-billion in vendor financing and a further R1-billion in “shareholder support”. Levy said this promise of shareholder support may have been what spooked investors.

In response to a question from TechCentral on Tuesday for clarity regarding the R1-billion of shareholder support, Blue Label said that of the available facilities for Cell C, “R1.4-billion is now in place and has been fully drawn, replacing R1-billion of existing facilities”.

“In order to complete the capital expenditure programme, a vendor-backed facility of up to R1.4-billion is being raised for 2019. The shareholder-backed facilities are available to Cell C as a soft agreement for liquidity,” it said. “This is not set in stone and imposes no further obligation on Blue Label and is over and above the current needs of Cell C. Blue Label previously loaned R1.4-billion to Cell C, which was paid back at the end of July 2018. Blue Label has only committed a further loan of R300-million (shareholder backed) should it be required over the R1.4-billion in vendor financing. It is not anticipated to be needed.”  — © 2018 NewsCentral Media