How Cell C’s deals with Vodacom and MTN will make it profitable

Cell C will no longer be investing in its own cellular tower infrastructure and will instead rely on Vodacom and MTN for its radio network.

The deals the company has with MTN and Vodacom are quite different, but Cell C has explained that ultimately they will be used to achieve the same goal — significantly reducing its capital expenditure to become profitable.

Cell C is migrating its contract and broadband customers to Vodacom, which means they can soon expect the same coverage and service levels as Vodacom subscribers.

At the same time, Cell C is building its own radio access network (RAN) on MTN’s infrastructure and is migrating its prepaid subscribers to MTN.

Over the next three years, Cell C will move its customers from its own network onto partner networks and decommission its own towers.

Cell C CEO Douglas Craigie Stevenson said their plan is to become South Africa’s largest buyer of wholesale network capacity and infrastructure services.

Cell C will then differentiate itself by focusing on innovative products and services, without owning expensive network infrastructure.

Back in Black

Zafar Mahomed, the chief financial officer of Cell C, has said that over the next three years there will be a major shift on the company’s financial statements.

“What will happen over the next three years is our roaming costs will increase disproportionately relative to everything else,” Mahomed explained.

However, at the same time Cell C’s direct network costs — the fees it would have paid on rentals to tower companies — will drop.

The biggest impact of Cell C’s decision to switch off its radio access network, and rely on wholesale services from Vodacom and MTN, will be on capital expenditure (Capex).

“The big impact is going to be below the profitability line, which is on the Capex line,” said Mahomed.

“Where ordinarily we would have spent somewhere on the order of between R2.5 billion to R3.5 billion, that will drop to just under a billion rand.”

Mahomed said that Capex is not going to disappear from the company’s financial statements entirely, as Cell C will still have to invest in its core and billing systems.

“Yes, our roaming costs will increase and Vodacom and MTN will enjoy the benefit of that because for them it’s spare capacity they’re using. For us it means a cost saving,” Mahomed stated.

“For the industry it’s really good. It meets ICASA’s requirements in terms of making sure that we build sustainable businesses and that we’re not putting up towers everywhere.”

“Not sustainable”

Mahomed said that they had to make major changes at Cell C if the company was going to survive.

“When Douglas [Craigie Stevenson] and I got into the business two years ago what we walked into was a mess, frankly,” he said.

“We realised that the previous [recapitalisation] did not have the desired outcome.”

The recapitalisation Mahomed referred to was when Cell C’s former management team made a deal with Blue Label Telecoms that would ultimately see the company acquire a 45% stake of Cell C for R5.5 billion. The deal was concluded in August 2017.

While this recapitalisation restructured Cell C’s debt so that it was denominated in rand, the company was still saddled with large loan accounts. This made it all but impossible for Cell C to turn a profit.

In August 2019, S&P Global downgraded Cell C’s rating to Default (D), saying that unless Cell C recapitalised its balance sheet (again) it was unlikely that the company could meet its debt obligations.

By the time S&P downgraded Cell C, the company had already suspended the interest payments on its loans. Cell C said that this was part of a plan to improve its liquidity and restructure its balance sheet.

In January 2020, Cell C had defaulted on a R2.7 billion loan that was due in December.

It also defaulted on its interest and capital repayments for bilateral loan facilities with Nedbank, China Development Bank, Development Bank of Southern Africa, and the Industrial and Commercial Bank of China.

Blue Label Telecoms assured the market that there was nothing to worry about as Cell C’s creditors were fully informed and committed to resolving the situation by agreeing to restructuring terms.

“There was a lot of fixing to do,” Mahomed stated.

“As a mobile operator we were not profitable. We had stacks of debt on our balance sheet that needed addressing and we had a business model that was not sustainable.”

Making difficult decisions

Cell C is amidst another recapitalisation, with the Competition Commission conditionally approving the acquisition of Cell C’s assets by a special purpose vehicle (SPV) called Gatsby Security SPV.

Among the conditions is that the trust that will take ownership of Cell C’s assets may not be controlled by competitors, or by anyone with a customer-supplier relationship with Cell C.

Last year Blue Label Telecoms joint CEO Brett Levy said that the recapitalisation was nearly completed, predicting that it would be finalised before the end of 2020. There have been no further announcements regarding Cell C’s recapitalisation.

“You cannot recapitalise a business every two years,” Mahomed stated. “We had to look for different ways to make sure Cell C could be a sustainable business.”

Two of those changes were shutting down Black, Cell C’s video streaming and entertainment platform, and significant restructuring of the company’s top management.

Why Cell C won’t be building its own radio network anymore

Cell C also had to acknowledge that it could not outspend Vodacom and MTN on network investment.

“The industry spends on the order of R20 billion per year [on capital expenditure],” said Mahomed.

“Now you’ve got 5G coming on stream. The latest estimate is that it’s going to cost the industry in excess of R200 billion to roll out 5G.”

According to Mahomed, this is simply not sustainable and the traditional mobile network operator (MNO) model is coming to an end.

“If you look at where MNOs are, they’re all going into financial services, they’re all going into content,” he stated.

“You’ve got to understand that the industry is at a crossroads. You cannot sustain four competitors in this industry.”

Mahomed said that they want to give their customers the best quality networks available.

“To be frank, we don’t have the capability to do that,” he said.

“If you gave me R20 billion per year for the next 10 years I still won’t catch up with Vodacom and MTN. It’s just not possible.”

Now read: Cell C execs paid R219 million while the company burned

Latest news

Partner Content

Show comments

Recommended

Share this article
How Cell C’s deals with Vodacom and MTN will make it profitable