Cell C’s unrecognised losses

Cell C needs to make roughly R2.2 billion in profit before majority shareholder Blue Label will once again recognise its contribution to the group’s bottom line.

That’s the word from Blue Label co-CEO Brett Levy regarding a note in the company’s annual financial statements.

“Blue Label will resume recognising Cell C’s share of the profits only after its share of the profits equals the share of accumulated losses not recognised,” it states.

Most recently, Cell C reported a R22 million before-tax loss, which became a R279 million after-tax profit due to an overprovisioning for tax from the previous financial year.

Blue Label stopped recognising Cell C’s share of profits and losses in 2019 after impairing its investment in the mobile operator to nil.

The impairment came after Blue Label took significant pain following its acquisition of Cell C, including the operator reporting an R8 billion loss in the financial year ended 31 May 2019.

Blue Label acquired a 45% stake in Cell C in 2017 as part of a deal to recapitalise the company when it was buckling under the weight of huge foreign-currency loans.

The company failed to turn a profit in the 22 years it has operated, accruing an enormous debt burden in a bid to compete against Vodacom and MTN.

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

Within two years of the first recapitalisation, it was clear that the deal had failed to deliver the planned result. Blue Label soon embarked on a second recapitalisation deal to try and rescue Cell C.

The severity of the situation became even more apparent when Cell C began defaulting on its debt in 2020.

It took almost three years for Blue Label and Cell C to conclude the second recapitalisation.

When the dust settled, Cell C emerged technically insolvent. Its liabilities had been reduced by over R2.7, but its assets had also been slashed as part of a strategy to stop pouring money into its own cellular network.

Cell C had decommissioned its radio access network, instead relying on roaming and network sharing agreements with Vodacom and MTN.

While Cell C’s balance sheet did not inspire hope, the company appointed several new board members and a new CEO, Vodacom veteran Jorge Mendes, to try and turn its fortunes around.

Mendes is leading a turnaround plan to save Cell C and transform it into a sustainable business that can stand on its own two feet.

He has described Cell C’s balance sheet as a “crime scene” that would take years to clean up.

However, he said the balance sheet was not their central focus to turning the company around —  becoming cash-flow positive was.

Blue Label’s latest results showed that Cell C had improved its negative equity position from -R4.0 billion to -R3.2 billion.

Mendes explained that the main reason for this improvement was a R1.46-billion loan from Blue Label for Cell C to repay lenders.

“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.”

Mendes said they will focus on ensuring the balance sheet doesn’t weaken further, with the company managing its costs tightly and becoming asset-light. 

Cell C CFO El Kope added that they are only starting year three of a six-year recapitalisation programme and that the path to solvency will not be completed overnight.

“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.”

The table below summarises Cell C’s after-tax profit and Blue Label’s unrecognised share of profits since 2019.

Share of profits in italics were calculated using Blue Label’s economic interest in Cell C, as no amount was reported in the group’s financial statements.

Date	Net profit after taxation	Blue Label economic interest in Cell C	Blue Label share of profits
31 May 2019	-R8,021,099,000	45%	-R3,609,494,550
31 May 2020	-R10,686,875,000	45%	-R4,809,093,750
31 May 2021	R2,453,367,000	45%	R1,104,015,150
31 May 2022	-R2,448,510,000	45%	-R1,101,830,000
31 May 2023	R4,630,809,000	63.19%	R1,838,337,000
31 May 2024	R279,479,000	63.19%	R176,603,000
Total loss not recognised since 2019			-R2,791,968,600