Blue Label’s long road back after R16 billion value destruction
Poor management decisions, fraud by senior executives, and Cell C’s delayed recapitalisation have destroyed R16 billion in shareholder value and caused the market to lose trust in co-CEOs Brett and Mark Levy.
Blue Label’s results for the six months ended 30 November 2021 showed a good performance, with R9.1 billion revenue and strong growth in gross profit and earnings.
Despite the continued good performance of the company over the last few years, the Blue Label share price has performed poorly.
After reaching a high of over R21 per share in 2016, Blue Label’s stock price has plummeted to under R2 per share in 2020. It equates to a market cap decline of R16 billion.
It has recovered somewhat since then, but at the current level of around R6.50 per share, it is still not close to where the company’s management thinks it should trade.
The reason for the poor share price performance is simple — investors have lost trust in Blue Label Telecoms and its management team.
The company has scored many own goals, including a large fraudulent scheme perpetrated by two former senior executives and delayed financial results.
However, the Levy brothers’ ambitious bet on Cell C was the biggest blunder.
On 2 August 2017, Blue Label bought 45% of Cell C for R5.5 billion through its wholly-owned subsidiary, The Prepaid Company.
Vestact CEO Paul Theron warned as far back as 2013 that Cell C was facing serious financial problems and decimated its business case with its aggressive pricing strategy.
Theron said Blue Label’s management team were idiots for getting mixed up with Cell C, comparing it to “grabbing an anchor and jumping off a pier”.
Brett and Mark Levy, Blue Label co-CEOs
The Levy brothers ignored these and other warnings, saying the market did not understand what they were planning with Cell C.
When the share price started to plummet, Brett Levy criticised investors saying they did not appreciate Cell C’s compelling growth prospects.
He said they had a clear strategy and vision for Cell C and that it is a “growth story” which will make the operator a very strong number-3 player.
The strategy included a big content play through Black, the now-dead streaming service on which Cell C spent R1.5 billion.
Things did not work out as planned. Cell C suffered a loss of R1.27 billion in the 2018/2019 financial year, its debt increased, and its content strategy failed.
Blue Label’s optimism about Cell C vanished along with its market cap. On 31 May 2019, Blue Label impaired its investment in Cell C to nil.
This impairment was not the end of Blue Label’s disastrous investment in Cell C.
Cell C remains one of the main revenue and profit drivers for Blue Label — both through airtime sales and other products.
Brett Levy told MyBroadband in August 2020 that Cell C made up to around 25% of Blue Label’s total profits as a group.
It is, therefore, in Blue Label’s interest to keep Cell C alive and try to make the mobile operator sustainable.
Core to keeping Cell C afloat is the planned recapitalisation, and debt restructure.
However, the promised recapitalisation has been dragging on for far longer than expected, further deteriorating investor trust in Blue Label.
What makes the Cell C debacle particularly painful to Blue Label shareholders is that the company owned Wireless Business Solutions (WBS), whose spectrum assets were used to build Rain.
Blue Label sold WBS, whose spectrum assets include 2 x 12MHz in the 1,800MHz band and 1 x 15MHz in the 2,600MHz band, to a company controlled by Paul Harris and Michael Jordaan.
Harris and Jordaan saw the value of WBS’s spectrum and struck a deal with Vodacom to help it build a new LTE network.
Rain has also launched successful 5G products and is rapidly growing its network coverage and subscriber base,
Harris and Jordaan’s WBS bet paid off handsomely. Rain is currently valued at R16 billion — far higher than Blue Label’s market cap of R5.85 billion.
Commenting on Blue Label’s lacklustre share performance, Theron questions why investors would buy Blue Label Telecoms when they can buy and hold Google, Amazon, and Microsoft.
“There has always been ‘a lot going on’ with Blue Label, which includes corporate misadventures every few years,” he said.
“The Cell C involvement I once described as ‘tying an anchor to your back then going for a swim’, and now there is this murky fraud by directors of a subsidiary.”
“Mind you, the Levy brothers have hung in there, and they still generate very solid revenues,” said Theron.
Paul Theron, Vestact CEO
Some consolation for Blue Label is that the solid revenue Theron refers to has helped its share price recover to over R6 per share.
Despite a 29% stock price increase over the last month, there is still a long road ahead for the Levy brothers to gain back the trust of investors.
They will have to make the much-touted Cell C recapitalisation deal happen, restructure its debt, and ensure the mobile operator becomes sustainable.
Blue Label’s latest results revealed that Cell C recorded an after-tax loss of over R832 million between June 2021 and November 2021.
Therefore, the recapitulation of Cell C is desperately needed to save the mobile operator. Lenders may even have to take a haircut on the debt.
There is no question that the Levy brothers are business pioneers who have built one of South Africa’s most successful technology companies.
It will, however, require all their business acumen and experience to save Cell C and win back the trust of investors.
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