Cell C is a big contributor to Blue Label Telecoms revenue and profit, and its value goes far beyond the 45% stake which Blue Label has in the mobile operator.
Blue Label, through its wholly-owned subsidiary The Prepaid Company, acquired a 45% stake in Cell C in August 2017 for R5.5 billion.
At the time, co-CEO Brett Levy said the acquisition made sense because of the opportunities which arose from consolidation and infrastructure sharing in the local telecoms industry.
He said this acquisition unlocked multiple synergies in the procurement chain, distribution network, and through products and services.
He was also upbeat about turning the struggling mobile operator around and said Cell C offered compelling growth prospects.
The market did not agree, and the Blue Label share price fell in the years following the acquisition.
So severe was this drop that Levy lashed out at the market reaction in 2018, saying investors did not appreciate the good work which was done at Cell C.
Levy said at the time they have a clear strategy and vision for Cell C, and that it is a “growth story” which will make the operator a very strong number-3 player.
His optimism about Cell C did not last long. Less than a year later – on 31 May 2019 – Blue Label impaired its investment in Cell C to nil (where it remains to this day).
While many people may perceive this write down as the end of Blue Label’s disastrous investment in Cell C, it is only part of the story.
Cell C remains one of the main revenue and profit drivers for Blue Label – both through airtime sales and other products.
To understand how closely Cell C is linked to Blue Label’s success, it is instructional to look at airtime sales and Comm Equipment Company (CEC).
Blue Label airtime sales
Airtime sales in South Africa – both offline and online – are the foundation of Blue Label’s business and account for a large portion of its revenue and profit.
The volume of prepaid airtime sales from Vodacom and MTN subscribers are much larger than that from Cell C, but this does not tell the full story.
Blue Label makes a much larger margin on airtime sales from Cell C, which makes it a significant contributor to profits despite relatively low volumes.
Levy told MyBroadband the significantly larger margins on Cell C are in line with what is seen internationally.
“Generally, around the world, your margin is better from the third, fourth, and fifth networks,” Levy said.
Another revenue driver for Blue Label is prepaid and postpaid SIM cards, which generated R635 million for the company in the last financial year.
Here, Blue Label’s relationship with Cell C is important to continue to distribute these SIMs and make a good margin on them.
Comm Equipment Company (CEC)
Comm Equipment Company (CEC) was founded in 2015 with a contract to supply and finance all devices supplied by Cell C to the market.
In its latest financial report, Blue Label said strong collections and better deal structures from Cell C have led to an improved book for CEC.
While CEC also has a DStv decoder business and an offering in the electricity space, its Cell C’s postpaid base remains its main business.
With a total book of R2.94 billion, the DSTV decoder book only accounts for R258 million.
Levy told MyBroadband that CEC is a powerful group in the Blue Label stable which generates around R200 million in net profit per year.
Blue Label’s relationship with Cell C is therefore important for CEC’s success and growth prospects.
Cell C’s true value to Blue Label
Levy told MyBroadband that as a whole, Cell C makes up to around 25% of Blue Label’s total profits as a group.
“If Cell C had to close their doors, which we really have never believed, we would lose between 20% and 25% of our profit,” Levy said.
He explained that the actual loss will be much lower as Cell C’s customers would migrate to another network.
“It would therefore not be a straight-line loss of 25% because we would obviously pick it up on the other side,” he said.
“If Cell C closed down, the end result for us would probably be a 10% to 15% decline on what you see today. That would be the worst-case scenario.”
It is therefore in Blue Label’s interest to ensure Cell C stays alive and continues its operations in future.