Cell C owner almost doubled people’s money in a year

Despite its struggles with Cell C and complex reporting, which typically repel investors, Blue Label Telecoms’s share price has nearly doubled over the past year.

Blue Label Telecoms was founded by two brothers, Mark and Brett Levy. In high school, they started a business selling televisions, hi-fi sets, car radios, and other electronics from the boot of their cars.

This venture soon expanded into insurance replacements and consumer electronics distribution, laying the foundation for Blue Label Telecoms.

Leveraging their growing network, they positioned themselves as major players in prepaid services. 

A breakthrough came in 2001 when Telkom awarded Blue Label a national contract to distribute prepaid airtime for fixed-line services.

This helped them to build an extensive distribution network that soon attracted Vodacom, MTN, and Cell C, just as South Africa’s cellular market took off.

Their industry innovation was replacing physical scratch cards with electronic distribution.

This proved a significant success in the local telecoms industry as it cut logistics costs, reduced theft, and simplified merchant inventory. 

As its system gained traction, Blue Label expanded into prepaid electricity, water vouchers, starter packs, and ticketing, cementing its national presence.

The company’s success drew major investors from inside and outside South Africa, including Microsoft, which took a minority stake when Blue Label was listed on the JSE in 2007.

While Microsoft later divested, Mark Levy noted that the deal “opened a lot of doors” for Blue Label.

The company also expanded internationally, launching in India and Mexico. In just 18 months, Blue Label Telecom Mexico grew to 4,000 points of presence. 

Though Blue Label later sold its stake to Grupo Bimbo in 2020, the experience reinforced its global reputation in prepaid services.

Strategic acquisitions, such as Viamedia and RMSC, bolstered Blue Label’s market position, and by 2016, its market cap peaked at R19 billion. 

However, missteps and risky investments over the past few years have seen its valuation drop to around R6.5 billion.

The company’s decline can largely be attributed to its costly and turbulent investment in Cell C.

Cell C

Blue Label’s interest in Cell C started in August 2017, when the company signed its biggest deal ever by acquiring 45% of Cell C for R5.5 billion.

This acquisition was done during a restructuring process that also created three special-purpose vehicles to store the distressed company’s debt.

At the time, Blue Label co-CEO Brett Levy said they were positive about a turnaround in Cell C’s financial and operational performance.

However, Cell C has remained a drag on the company’s results since, and in 2020, Blue Label had to write down its investment in Cell C to zero.

While there are some signs of recovery today, the mobile operator is still technically insolvent.

In its latest results for the six months through November 2024, Blue Label reported another set of weak results.

The company’s total revenue decreased by 4% to R7.2 billion, while its earnings per share were down 4% to 43.98 cents per share.

In addition to its poor results, Blue Label’s reporting is renowned for being complex, and its accounting structure can be complicated to understand.

Yet, despite these factors, Blue Label’s share price has rallied impressively over the past year.

Urquhart Partners’ Richard Cheesman pointed out that while Blue Label’s share price has grown significantly over the past year to around R7.17 per share, it is still far from its peak of nearly R21 in 2016.

In fact, the company’s share price has yet to recover to the price it was listed for in 2007, R6.75.

However, Cheesman told Daily Investor that the recent rally in Blue Label’s share price is not necessarily just short-term speculation but backed by investors who believe in the company’s fundamentals.

Blue Label’s boom

He outlined four reasons that could have contributed to Blue Label’s impressive share price growth over the past year.

The first is the outcome of South Africa’s May 2024 general elections, which led to the formation of the Government of National Unity.

This outcome was broadly seen as positive, and many South African stocks rallied following the election, and smaller cap stocks like Blue Label did particularly well.

The second reason is that, simply put, Blue Label is a relatively inexpensive stock and, even after the rally in its share price, is only trading at a price-to-earnings ratio of less than 10 times.

The third factor behind Blue Label’s share price rally is Cell C, which is one of the company’s most important and profitable customers.

Despite its struggles in previous years, some signs of a recovery have emerged over the past few months.

The mobile operator has switched up its management and announced a “brand refresh” in August 2024.

CEO Jorge Mendes also said in early 2024 that Cell C’s aim is to reclaim at least its position as South Africa’s third-largest telecoms company from Telkom.

Its latest interim results for the six months through November 2024 showed that Cell C’s losses have narrowed, although it remains technically insolvent, with its liabilities outweighing its assets.

The fourth factor behind Blue Label’s share price rally is linked to the third, centering around the amount of time and money the company has poured into Cell C.

This means that Blue Label has an incentive to make its investment in the mobile operator worthwhile and get some return on its investment.

There is some hope for this happening, as Blue Label is in the process of taking control of Cell C.

Earlier this year, communications regulator Icasa approved the transfer of Cell C’s spectrum and network licenses to Blue Label.

Now, the companies only await approval from the Competition Tribunal to approve the consolidation, with the Competition Commission having recommended that it does so.

Cheesman said this would likely simplify Blue Label’s currently complex accounting structure.

Since a significant portion of Cell C’s debt is owed to Blue Label, it will disappear upon consolidation.

In addition, the consolidation could result in a more understandable balance sheet for Blue Label, removing complexity and making Cell C’s balance sheet look rosier.

Therefore, there are a lot of fundamental reasons behind Blue Label’s share price rally over the past year.

While Cheesman said it may not yet be clear to all market observers that the ship has been righted at Cell C, he added that positive signs have emerged.

He said the release of detailed financial statements for Cell C, which would crucially need to include its cash flows and detailed bottom-line profitability, would go a long way to giving investors better insight into the business’ viability.

“There are a couple of businesses in South Africa which have been almost ‘zombie-like’ businesses in the past, such as Ster-Kinekor, Edgars, and Cell C,” Cheesman said.

“These companies were kept alive, barely, and it always takes quite a bit of convincing to change perceptions and show that these may now be vigorous businesses, which are alive again, and not just the walking dead.”

Regardless of the reasons behind it, Blue Label’s share price has continued to perform well, and it is up around 30% in the year to date.

This article was first published by Daily Investor and is reproduced with permission.