Cell C owner explains why it is worth more than R98 million

Blue Label Telecoms recently announced that its subsidiary, The Prepaid Company, will pay R6 million to acquire an additional 6.09% stake in Cell C, representing 88,939,299 shares, from credit investor Gramercy.

This indicates a valuation for Cell C of just over R98.5 million. However, Blue Label has told MyBroadband that inferring an equity value based on the transaction would be inaccurate.

The company said Gramercy’s investment has always been in the form of debt and therefore the stake’s value must be viewed in that context.

The announcement that The Prepaid Company was acquiring Gramercy’s stake in Cell C was part of a larger notice about it buying over the lender’s claim of R414,765,527 plus interest.

However, Blue Label emphasised in the notice that the share deal was entirely separate and not in any way inter-conditional on the debt claim transaction.

When asked about this, Blue Label explained that although the two transactions are separate, it is important to understand where Gramercy’s equity stake comes from.

“As part of the newly recapitalised Cell C, Gramercy also received a notional equity stake in Cell C, which served as a security blanket,” Blue Label told MyBroadband.

Cell C went through two recapitalisation deals in an effort to prevent the mobile operator from going bankrupt.

In addition to a substantial cash injection from The Prepaid Company, the last recapitalisation offered debt holders a choice:

1. Take an 80% haircut and exit; or
2. Remain as a debt holder in the new Cell C and take a 45% haircut, with the balance paid out in later years.

Blue Label explained that the second option was the higher risk, higher reward scenario, which Gramercy selected.

“It is important to note that Gramercy’s investment in Cell C was in the form of debt,” said Blue Label.

“As such you cannot infer an equity value based on the transaction of Gramercy’s sale of equity in Cell C, but rather, their success is measured in terms of the value they received against the post-recap debt investment.”

Blue Label has agreed to buy Gramercy’s R414-million debt (plus interest) for R450 million.

“As a result, Gramercy leaves this deal having received their full 55 cents to the rand, ” Blue Label told MyBroadband.

“Blue Label benefits through accruing an additional 6% equity stake in Cell C, subject to certain regulatory approvals, and further consolidating Cell C’s debt,” it continued.

“We will also receive a monthly interest payment from Cell C, coming out with a positive spread, with interest income greater than the interest expense.”

Blue Label said the move shows its confidence in Cell C’s turnaround.

Among the conditions that must be met for the debt claim transaction to proceed is obtaining the necessary consent from Cell C’s lenders, and foreign exchange approval from the Financial Surveillance Department of the South African Reserve Bank.

Blue Label must also obtain any approvals required by Cell C’s memorandum of incorporation.

For the share purchase deal, Blue Label said it would require the approval of the Competition Tribunal and Independent Communications Authority of South Africa.

Although The Prepaid Company currently holds less than 50% of the voting power in Cell C, it is the majority shareholder.

As of Blue Label’s latest financial results, The Prepaid Company has a 63.19% economic interest in Cell C. It has applied to the relevant authorities to take a controlling stake in the mobile operator.