Cell C is in deep financial trouble. It is unable to pay its debt and its total liabilities are three times higher than its total assets.
With Cell C’s liabilities and debts exceeding its assets and its inability to meet its debt obligations on time, the company is insolvent.
Its financial situation is so dire that the auditors of Cell C’s largest shareholder, Blue Label Telecoms, have not classified Cell C as a going concern for a while.
In Blue Label Telecoms’ latest annual financial statements, PricewaterhouseCoopers stated that the “solvency and liquidity of Cell C remain unproven”.
It added that the “probability percentage of the solvency and liquidity of Cell C remaining unproven” is 49%.
What this means, in simple terms, is there is about an equal chance of Cell C surviving as it currently stands.
Cell C, however, remains upbeat about its prospects. It told MyBroadband it remains focused on restructuring its balance sheet and optimising the business for long-term competitiveness.
“We have a legacy debt challenge in our balance sheet, rather than an income statement one, which will be addressed with the recapitalisation,” it said.
Cell C also downplayed its debt defaults, saying its lenders understand its turnaround strategy.
“While we negotiate a complex recapitalisation with multiple stakeholders, there is an informal debt standstill and a suspension of debt payments,” the company said.
It added that lenders have held off on calling up the entire debt owed, and constructive discussions are in progress to conclude an agreeable restructuring of the company’s debt.
“We are making good progress on the recapitalisation process and term sheets are out,” Cell said.
It highlighted that its operational performance is improving and that it generated R418 million more cash from operations in the first six months of its 2020 financial year compared to the previous period.
Cell C said its investors are also looking forward to the proposed recapitalisation that will significantly reduce debt, provide working capital, and drive revenue growth and profitability.
To get an objective view on Cell C’s financial situation, MyBroadband asked Protea Capital Management senior investment analyst Richard Cheesman for comment.
Cheesman said Cell C has defaulted on its debt and is only able to continue operating because the lenders have not called the debt.
This is because the lenders understand that Cell C is worth more as a going concern and that the recoverability of the debt will be higher if Cell C continues to operate.
Cheesman said Cell C’s survival hinges on its long-mooted restructuring process, where the lenders may be asked to take a haircut on the debt.
Lenders will be weighing up the recoverability in each scenario, but will also be cognisant of softer factors like bad PR which could come from liquidating the business.
To date, Cell C’s lenders have been accommodating of the company’s debt defaults, but this could change.
Commenting on Cell C’s restructuring plan, Cheesman said the current course of action – using MTN’s network, cutting unprofitable customers and products, and a capital restructure – seems to be the best, and possibly only, course of action.
Should this restructuring and recapitalisation process fail, it is possible the company will have to be dismantled.
Cheesman said it would be a herculean feat if Cell C’s problems can be resolved in a manner where shareholders will recoup their investments.