Cell C’s plan to fix its financials

Cell C has made good progress in improving its financial health, but the company remains technically insolvent, and its CFO said it would take years to fully recover to a position of strength. 

Despite a relatively strong start in 2001, Cell C has not met expectations. It was not the disruptive force many South Africans hoped it would be.

The company has failed to turn a profit in the 22 years it has operated, accruing an enormous debt burden that it is still struggling to pay off. 

It has also suffered from a lack of strategic direction, with a regularly changing leadership team and, at times, conflicting strategies. 

Over time, this has resulted in the company’s balance sheet being steadily weakened to a point where it was hopelessly insolvent. 

Current CEO Jorge Mendes has described Cell C’s balance sheet as a “crime scene” which would take years to clean up. 

Mendes is currently leading a turnaround plan to save Cell C and turn it into a sustainable business in the coming years that can stand on its own two feet. 

In an interview with Daily Investor, Mendes said becoming cash-flow positive is central to this and is the main focus of the company – not its balance sheet. 

“I think the one thing we have been clear on is that we don’t need our balance sheet for now,” Mendes said. 

“I have been quoted as saying our balance sheet has been a bit of a crime scene in the past. It has improved a little bit, but the reality is we do not need it for now.” 

In Cell C-owner Blue Label’s latest results, the company was still technically insolvent, with its liabilities of R17.3 billion exceeding its assets of R14.1 billion. However, it was an improvement from the previous year.

The indication is that Cell C is on the path towards solvency, from where it can begin using its balance sheet to fund its growth. 

The path to solvency 

This path will not be completed overnight, with CFO El Kope saying the company is only in year two of its six-year recapitalisation plan. 

This is the latest attempt to recapitalise the mobile operator, with Mendes determined to take this opportunity to build a sustainable business. 

As part of this recapitalisation programme, Blue Label loaned R1.46 billion to Cell C to repay lenders. The lenders received 20% of their claimed loans. 

This is the main reason behind the company’s improved balance sheet. The hard work to build a business that can sustainably grow and meet its debt obligations is starting now. 

“Our focus is not on the balance sheet yet. We focus on ensuring that operational KPIs are aligned and that we are cash-flow positive and on the front foot,” Mendes said. 

“In a nutshell, we will continue to grow the revenue across all our lines of business. That is a 100% reliable and sustainable company. And, I think, after 12 to 18 months, it will be something reasonable.”

“So, I think the momentum only starts now, if I am brutally honest. We have been looking internally for the past year and sorting out the foundations of how to address the market.” 

Kope agreed with Mendes, saying that instead of shifting focus completely onto the balance sheet, the company will continue on its existing recapitalisation journey. 

“We have consistently said the recapitalisation was a six-year programme, and we are only ending year two now in September 2024,” she said. 

“We will continue to unwind our liabilities, and you will start seeing the acceleration of that unwinding over the next two years. Then we will start focusing on the shareholder debt.” 

“What is unique for us is that all our long-term debt is shareholder debt, and we will start unwinding that well into 2028 and 2029.” 

A key focus for Mendes is ensuring the company’s balance sheet does not deteriorate further, with the company managing its costs tightly and becoming asset light. 

Mendes said Cell C has renegotiated almost all the agreements it has had in place with landlords, suppliers, and partners. 

This has resulted in costs decreasing on more than 47 agreements the company entered into. 

Another way in which the company is managing its costs is by franchising its stores, enabling it to move employees off its payroll. 

However, this has been offset in the short term by the hiring of around 70 people to ensure Cell C has the capacity to execute its turnaround plan. 

Ultimately, this has all been a period of preparation for Cell C to provide a platform from which it can grow, generate cash, and create a sustainable business. 

“I have never felt more confident in my entire life about the ingredients we have to drive revenue growth and be a sustainably profitable business.”

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