Cell C recapitalisation plan announced — but questions remain

Blue Label Telecoms announced yesterday that it concluded a non-binding term sheet with Cell C and its various financial stakeholders, but several questions remain about the deal.

To restructure Cell C’s R7.3 billion debt to certain secured lenders, Blue Label’s wholly-owned subsidiary, The Prepaid Company (TPC), will loan the mobile operator a maximum amount of R1.46 billion.

It anticipates only needing to lend Cell C R1.03 billion.

Cell C will then use this loan from Blue Label via TPC to settle secured lenders’ claims by paying an amount of 20c to the rand.

“Certain secured lenders have indicated that they wish to remain invested in Cell C,” Blue Label stated.

“These secured lenders will be entitled to loan an amount equal to the 20c received, back to Cell C under a new loan arrangement.”

This new loan arrangement will have an aggregate capital face value equal to 2.75 times the amount advanced.

In addition, the participating lenders will be entitled to share pro-rata in a fresh issue of ordinary shares in Cell C at a nominal value.

All shareholders of Cell C will dilute proportionately to enable the issuance of these ordinary shares to the participating lenders.

Simultaneously, Cell C will issue shares to The Prepaid Company.

At the end of this, The Prepaid Company will hold 49.3% of Cell C’s shares — up from its current holding of 45%.

In addition, a wholly-owned subsidiary of TPC, the Comm Equipment Company, will defer R1.1 billion owed by Cell C and some of its subsidiaries.

This debt will be repaid in equal monthly instalments over 60 months.

The Prepaid Company further committed to buying R1.2 billion in prepaid airtime from Cell C when the deal goes through.

It will then buy an additional R300 million prepaid airtime every quarter a year after the deal’s effective date.

“TPC will raise R1.6 billion of the required funds from financial institutions, through an Airtime Purchase transaction, for the purpose of facilitating the Proposed Transaction, and will have an obligation to repurchase such airtime over a 24 month period in equal monthly instalments,” Blue Label stated.

Importance of Cell C to Blue Label

The substantial additional investment from Blue Label into Cell C with this transaction shows how important it is to the company, and how intertwined the two businesses are.

Blue Label co-CEO Brett Levy told MyBroadband in August 2020 that Cell C made up to around 25% of Blue Label’s total profits as a group.

Analysts have raised concerns that Blue Label’s profitability may be overstated because the margin they get from reselling Cell C airtime is much more than other operators.

This is concerning because Cell C itself has not been sustainable.

Blue Label’s co-CEOs also previously said they planned to recoup their investment in Cell C with the recapitalisation.

However, the recapitalisation plan presented proposes precisely the opposite — further investment from Blue Label.

MyBroadband asked Blue Label about its plans to recoup its investment in Cell C, but it did not respond by the time of publication.

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