Cell C is technically insolvent and is heading for bankruptcy unless a deal is struck to recapitalise the company.
Cell C’s latest financial results show the company’s total liabilities of R21.4 billion far exceed its total assets of R8.2 billion. The company, therefore, has negative net equity of over R13 billion.
The operator’s dismal financial situation means it cannot meet its financial obligations.
It has defaulted on its debt for years and had its credit rating cut to D (default) by S&P Global Ratings.
Cell C’s significant asset deficiency and inability to meet its financial obligations, like paying its debt, means it is headed for bankruptcy.
The only thing which can save the mobile operator is the planned recapitalisation to strengthen its balance sheet.
Blue Label, Cell C’s largest shareholder, announced in March that it had concluded a non-binding term sheet with Cell C and its financial stakeholders.
To restructure Cell C’s R7.3 billion debt, Blue Label’s wholly-owned subsidiary, The Prepaid Company (TPC), will loan the mobile operator up to R1.46 billion.
Cell C will then use this loan to settle secured lenders’ claims by paying an amount of 20c to the rand.
Blue Label Telecoms co-CEO Brett Levy previously said they would complete the recapitalisation by May, but this has not happened.
However, Cell C recently called a meeting of debtors to vote on whether they will take an 80% haircut on their debt as part of a deal to recapitalise the mobile operator.
The vote will take place on 20 June 2022. At least 75% of votes controlled by debtors with first-priority secured notes must approve the deal to be binding on all noteholders.
Commenting on the process, Cell C CFO Zaf Mahomed said the restructuring and refinancing of Cell C had been long and complicated.
“The company is pleased to be closer to concluding a transaction that will deleverage the balance sheet and provide the required working capital to operate and grow the business,” he said.
Cell C would not comment on the bigger plan to reverse its asset deficiency and become a sustainable mobile operator.
Mahomed only said Cell C would give a market update after the recapitalisation process.
The images below show Cell C’s net equity over the last four years and Cell C’s current balance sheet.
Progress in other areas
Commenting on the plan in March, Cell C CEO Douglas Craigie Stevenson said he is pleased to be closer to concluding the recapitalisation deal.
“Restructuring the balance sheet and improving Cell C’s overall liquidity were part of the four-pillar strategy we put in place,” he said.
Two of the other pillars are improving operational efficiencies and implementing an innovative network strategy.
“We have made significant strides on the latter two,” Craigie Stevenson said.
Cell C has slashed its operational expenses, including reducing its workforce from around 2,900 to 840 over the last few years.
Cell C has also slashed its capital expenditure by decommissioning its physical radio access network (RAN), including towers, base stations, antennas, and radio and transmission equipment.
It has partnered with MTN, which provides a “virtual radio network” for Cell C users.
Cell C uses its own spectrum on this virtual RAN. It is also responsible for its spectrum licenses, core network, transport network, billing system, and subscriber management.
Decommissioning its network hasn’t eliminated Cell C’s capital expenditure (Capex). It needs to invest in billing, core, long haul transmission, and other platforms to enable digital products to its consumers.
However, its Capex plummeted from over R2 billion in 2018 to around R200 million in 2021.
This saving is partly offset by Cell C’s network expenses from leasing capacity from other infrastructure providers. In the first six months of 2021, Cell C paid R531 million to other operators.
Despite significant network expenses, it is still a sound decision for Cell C to do away with building and maintaining its own network.
It is impossible for Cell C to compete against Vodacom and MTN, which are pumping over R10 billion into their networks each year.
The image below shows Cell C’s network transition from running its own RAN to moving to a virtual network.