Arrogance and thinking you can beat the market have cost Blue Label Telecoms dearly, said Sasfin Securities deputy chairman David Shapiro.
Blue Label Telecoms’ share price has plummeted from R21.00 per share to under R3.00 per share after it bought a 45% stake in Cell C for R5.5 billion.
This share price slump shaved billions off the value of Blue Label Telecoms, and the situation remains dire.
The company announced today that its basic, headline, and core headline earnings per share for the year ended 31 May 2019 are expected to decrease by more than 20%.
While the core businesses of the Blue Label group continued to generate profits, Cell C’s trading losses were partly to blame for dragging the company down.
Blue Label delays financial results
While the lower headline earnings per share is a cause for concern, the biggest shock came when it delayed its financial results because of issues related to Cell C.
Blue Label said its audit for the year ended May 2019 was ‘substantially complete’, but that it was in the process of determining the valuation of its investment in Cell C.
This valuation, the company said, “incorporates the effects of the transactions that are currently in progress” which will have “an impact on the carrying value of the investment”.
This delay, which means Blue Label’s results will only be available four months after its year-end, shook investors, and the company’s share price plummeted to an all-time low.
“Two smart jockeys on a bad horse”
Shapiro described Blue Label’s decision to buy a large stake in Cell C as a sad situation which hurt a good business.
He said Blue Label’s co-CEOs, brothers Brett and Mark Levy, can be described as “two smart jockeys on a bad horse”.
He said Cell C was failing when they bought a stake in the company and that these two good businessmen are struggling to turn it around.
“Sometimes it is arrogance. You always think you can beat the market or that you are better than the market. It is not the first time it has happened – the JSE is littered with similar stories,” he said.
Don’t enter an already saturated market
Speaking to Business Day TV, FNB Wealth and Investments’ Wayne McCurrie said there is a lesson which can be learned from Blue Label’s mistake – “Do not enter a saturated market”.
McCurrie said any company entering a saturated market has only one way to compete – lower prices.
This, however, means that it becomes a “race to the bottom” which is great for consumers, but bad for companies.
He said Cell C’s shareholders could not make the company work and it will be very difficult for any new shareholders to turn it around.
Some good news is that Cell C CEO Douglas Craigie Stevenson recently unveiled a turnaround plan to save the company.
This plan includes a recapitalisation programme aimed at extracting greater value from its roaming agreement and optimising its network revenue and usage.
In response to questions from MyBroadband about its investment in Cell C, Blue Label said its turnaround plan is on track.
“As you are aware, we are busy with transactions to restructure Cell C’s balance sheet and re-gear the company for a new operating model,” said Blue Label head of investor and media relations Nicola White.
“The transactions are progressing well, and we look forward to updating the market,” White added.