The R15-billion blunder

The technology world is littered with blunders which cost companies billions of dollars and saw them fall out of favour with investors.

In 1999, for example, Excite had the option to buy Google for $750,000 with the agreement that Excite would replace its search technology with that of Google.

Excite CEO George Bell rejected the deal, which was a costly mistake. Google is now one of the biggest companies in the world with a market cap of around $1 trillion.

Another famous blunder is Kodak’s decision to shelve its digital camera plans in the late seventies in favour of film, which was its main revenue stream at the time.

Even when the world started to move towards digital photography, Kodak continued to focus on traditional film cameras.

This was a strategic blunder, as Kodak could not catch up with more established digital camera manufacturers when the world changed. It filed for bankruptcy protection in 2012.

In South Africa, there are also a few examples of big business mistake, like Telkom’s decision to sell its 50% shareholding in Vodacom.

This article will focus on one of the biggest business blunders – Blue Label Telecoms’ decision to sell WBS and buy Cell C.

Blue Label Telecoms selling WBS

Blue Label Telecoms was a big shareholder in Wireless Business Solutions (WBS), the parent company to iBurst and Broadlink.

iBurst was well known for providing wireless broadband access, while Broadlink focussed on corporate connectivity solutions.

WBS’s biggest asset was spectrum, which included 2 x 12MHz in the 1,800MHz band and 1 x 15MHz in the 2,600MHz band.

This spectrum was used to provide wireless broadband access to iBurst subscribers and for a WiMax deployment in partnership with Vodacom.

While Broadlink was profitable, iBurst struggled and the WiMax deal with Vodacom did not take off as expected. In short, WBS did not make money.

WBS shareholders grew tired of funding the company and Blue Label had its eye on a much bigger prize – Cell C.

Blue Label and other WBS shareholders subsequently decided to sell the company to Multisource in 2015.

Shortly after selling WBS, Blue Label announced its plan to buy a 35% stake in Cell C for R4 billion.

The deal evolved over the next two years, and Blue Label ultimately bought a 45% stake in Cell C for R5.5 billion in August 2017.

This was a disastrous decision. Cell C’s mountain of debt and large losses dragged Blue Label down and investors lost trust in the company.

Not even Blue Label’s decision to write down Cell C’s value to zero helped to revive trust in the company.

Since hitting a high of over R21.00 per share in October 2016, the share price plummeted to its current level of around R3.50 per share.

This means Blue Label Telecoms’ market cap shrunk from R19.3 billion in October 2016 to its current R3.25 billion.

The company, therefore, lost most of its value since investing in Cell C, which co-CEO Brett Levy admitted was a very bad move for the group.

The graph below shows the Blue Label Telecoms share price over the last 5 years.

Rain is born

While Blue Label was trying to turn the struggling Cell C around, WBS started to make waves in the mobile market.

At the helm of WBS’s strategy were its two major shareholders and former bankers, Paul Harris and Michael Jordaan.

Instead of trying to raise money and build their own LTE network – which WBS unsuccessfully tried in the past – they partnered with Vodacom.

Harris and Jordaan saw the value of WBS’s spectrum in an environment of rapid mobile data growth and a government which has been dragging its feet on licensing additional spectrum.

After the failed attempt to acquire Neotel, which would have given it more spectrum, Vodacom had to make another plan.

WBS had an asset which Vodacom desperately needed – spectrum – which made it possible for Harris and Jordaan to negotiate a killer deal.

In return for giving Vodacom access to its network, WBS basically got a brand-new LTE network for free.

Officially, WBS was leasing aspects of Vodacom’s sites and facilities while Vodacom was paying to roam on WBS’s new network.

In reality, Vodacom was funding the new LTE network which could be rolled out at breakneck speed as it was done using its own infrastructure.

In 2017, WBS was rebranded as Rain and armed with a new LTE network, and the company launched its first fixed-LTE retail offering shortly afterwards.

A year later, Rain launched mobile data packages, competing directly against established mobile operators.

Rain also rolled out a 5G network and launched its first commercial 5G products in Gauteng in September 2019.

Harris and Jordaan’s WBS bet paid off handsomely. African Rainbow Capital (ARC) currently values Rain at R15.03 billion – nearly five-times Blue Label’s market cap.

The Blue Label blunder

With Rain’s valuation dwarfing the market cap of Blue Label, it raises the question of why Blue Label missed the opportunity to do exactly what Harris and Jordaan did.

MyBroadband spoke to industry players about Blue Label’s decision to sell WBS and buy Cell C, and they said there were a few reasons for this mistake.

  • Blue Label always wanted to own a big-brand mobile operator because of pride and to protect its existing revenue streams.
  • The WBS shareholders did not realise the true value of the spectrum the company owns.
  • There was no appetite from WBS shareholders to further fund the company and the roll-out of a new LTE network.

What is surprising is that the idea to partner with Vodacom was nothing new for WBS or Blue Label.

In 2008, WBS partnered with Vodacom to deploy a commercial WiMax network using WBS’s spectrum.

WBS, therefore, had the blueprint for the deal which Harris and Jordaan made with Vodacom for a new LTE network.

The decision to not pursue this avenue and buy Cell C instead is still haunting Blue Label and has turned out to be one of the biggest business blunders in South Africa’s telecoms space.

Now read: Impressive Rain numbers released

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The R15-billion blunder