Cell C recently announced that it is still unable to make debt repayments, raising concern among industry players about the future of the company.
Earlier this month, Cell C defaulted on the payment of capital on its $184-million note which was due on 2 August 2020.
Cell C also defaulted on interest and capital repayments on loan facilities with Nedbank, China Development Bank Corporation, Development Bank of Southern Africa Limited, and Industrial and Commercial Bank of China Limited, which were due in January and July 2020.
Cell C said it was working with stakeholders to improve its liquidity, debt profile, and long-term competitiveness as part of its turnaround strategy.
“The turnaround strategy is focused on ensuring operational efficiencies, restructuring the balance sheet, implementing a revised network strategy and improving overall liquidity,” Cell C said.
It said while a new recapitalisation is being negotiated, there is an informal debt standstill and debt payments have been suspended.
Cell C added that “good progress in a complex recapitalisation is being made”.
Cell C to switch off its radio network
In March, Cell C CEO Douglas Craigie Stevenson said they are winding down their radio access network over the next few years through an expanded roaming agreement with MTN.
Craigie Stevenson dismissed views that Cell C will become an MVNO, saying they will keep their spectrum, core network, billing system, and other platforms.
“We will transition out our existing radio access network and bring in the new one, and with that comes the quality of service and everything that goes with it,” he said.
What this means, in simple terms, is that Cell C will no longer have its own mobile network.
The plan is for MTN to migrate all of Cell C’s network traffic onto its own radio network once the mobile operator has completed its recapitalisation.
There is, however, a challenge. MTN’s results showed that as of 30 June, it had not recognised R673 million in roaming payments from Cell C.
MTN Group CEO Rob Shuter said the next phase of their roaming agreement will only commence in earnest once Cell C is able to pay its bills.
Concern over the future of Cell C
MyBroadband spoke to industry players about Cell C, and many of them raised concern about the operator’s future.
They highlighted that the previous recapitalisation and turnaround strategy through Blue Label Telecom failed, and history may repeat itself this time around.
They added that telecommunications is a capital-intensive business and going up against Vodacom and MTN is a tough ask.
The two incumbents have excellent networks, strong brands, and deep pockets to outspend their competitors on marketing.
The only option for smaller operators to win market share from Vodacom and MTN is to beat them on price.
Lower prices, however, decimate their own business case, which is why Cell C has been battling for years.
Roaming on MTN’s network also limits Cell C’s ability to compete on price, which leaves it with very few ways to take on the incumbents.
This echoes the views of Vestact founder and CEO Paul Theron, who previously questioned the sustainability of Cell C.
Theron said “Blue Label were idiots for getting mixed up with Cell C” – a decision which was punished by the market.
Richard Cheesman, a senior investment analyst at Protea Capital Management, told MyBroadband the future for Cell C as a standalone mobile operator was not certain.
He said the company’s debt remains a major challenge which will have to be resolved for Cell C to survive.
Cheesman added that third- and fourth-place mobile operators in countries across the world have historically struggled to realise good returns, and this is also the case in South Africa.
ICASA did not move soon enough to allow the new telecoms entrants to compete successfully with the incumbents. This could have been done by lowering interconnect rates when Cell C launched in 2001.
This means Cell C never achieved sufficient profitability and it is partly why it needs another recapitalisation to survive.
The best-case scenario for Cell C, Cheesman said, is to merge with or be acquired by another telecoms company.
He explained that telecommunications is a scale business, and with its millions of subscribers, Cell C offers valuable assets to a suitable operator.
Another benefit Cell C can offer is the tax benefits associated with its losses, but any acquirer would need a strong balance sheet.
The roaming partnership with MTN can be seen as a step in the right direction, as it will significantly limit Cell C’s capital expenditure and give its customers a better network experience.
While MTN will not realise the tax benefits associated with a full merger or acquisition of Cell C, it does benefit from roaming revenue and a potential spectrum deal.
Cell C upbeat about turnaround
Despite the challenges around debt and the protracted recapitalisation process, Cell C remains upbeat about its future.
Cell C said it has a real opportunity to address its historical performance through its turnaround strategy.
“Operational improvements and right-sizing will set us up for future growth, allowing the streamlined entity to take advantage of a new network strategy,” Cell C said.
It added that improved business performance will enable a revised capital structure with manageable debt which will ensure long-term sustainability.
“There is belief in Cell C’s long-term prospects, and the new leadership team is focused on turning the company into a profitable, innovative player in the local telecoms industry,” said Cell C CEO Douglas Craigie Stevenson.
“We are positioning Cell C to be a competitive player and are cautiously optimistic”.