Cell C’s signal fading fast

Cell C, South Africa’s third-biggest cellphone company, has buyers circling as it flounders in the face of stiff competition from larger rivals.

Cell C executives confirmed this week that there has been growing interest in buying the operation, but said shareholders were not ready to sell because they were confident that management would turn things around.

But local analysts and global ratings agency Moody’s Investors Service do not have the same faith and believe the company is sinking.

Richard Hurst, analyst at BMI-Technology, said shareholders would do well to sell to a new owner that would inject innovation and fresh management.

“Cell C needs coherent direction, and right now that’s not happening. The company’s strategy is too scattered. In its current state, Cell C is doomed,” he said. “Voice will always be the bread- and-butter line, but the icing on the cake is data, on which Cell C is not capitalising. Vodacom and MTN are going aggressive with 3G service; where is CellC in this upwardly mobile and growth market?” Hurst asked.

Another local analyst, who did not want to be named, said: “Cell C is showing signs of drowning. There has to be fresh management, I wouldn’t be in that management team for all that money.”

There is market speculation that Telkom might sell its 50% stake in Vodacom to Vodafone, and make a bid for Cell C, with which it can work more closely to develop its fixed-mobile convergence strategy.

Reuters has reported Vodafone CEO Arun Sarin as indicating that his company was looking at buying out Telkom’s 50% stake in Vodacom and becoming a 100% shareholder. The deal could be worth as much as R75-billion.

Cell C was asked for comment on its financial position, growth strategy and speculation about a sale. But, at the time of going to press, the company had not responded.

Virgin Mobile SA, which has a 50% shareholding in Cell C, has indicated it is mulling a listing on the JSE at some point, and would consider buying out its partner’s stake if the opportunity presented itself.

“We don’t have plans to change our 50:50 shareholding structure with Cell C now . We’d like to go public within the next three years though,” Robert Samuels, telecoms director for Virgin, told Business Times from London this week.

Talk that Cell C is up for grabs comes as ratings agency Moody’s Investors Service downgraded the cellphone operator’s credit rating, and warned that company was “very close” to defaulting on its 805-million (about R5.6-billion) debt as it battles to generate enough cash to pay interest.

Cell C’s first-quarter loss almost doubled to R369.5-million, thanks to mounting debt repayments.

This prompted a warning from credit analyst Craig Jamieson that the company would default on its payments “within the next year”.

Moody’s said it would maintain a negative outlook on Cell C because of “continued weakness in the company’s business and financial profile”.

The company has failed to make an annual profit in more than five years in a boom market. Subscriber numbers have stagnated at around 3.3 million, compared to Vodacom’s 23 million and MTN’s 12.5 million, according to the companies’ annual reports.

Virgin Mobile has secured just 100 000 subscribers since entering SA in June last year, and has operated at a loss.

Moody’s indicated that Virgin Mobile was draining cash from its partner Cell C, adding that Sir Richard Branson’s company had underperformed initial expectations of attracting subscribers.

Moody’s is also concerned about CellC’s “business plan, the operating performance, weak liquidity headroom, limited financial flexibility, and the high churn rate”.

Cell C had a 96% churn rate for pre-paid subscribers and incurred a 2.9% loss on pre-paid customers in 2006, despite assertions by management that these rates were temporary in 2005.

Jamieson said a commitment from one of Cell C’s largest shareholders, Saudi Arabia’s Saudi Oger, to provide any funding the company requires may not be enough to prevent default and disaster next year.

Samuels said Virgin Mobile’s expectations for SA were similar to those for the US and UK, where it listed after three to four years of operating.

“Once the business is a bit more mature, it will be floated on the JSE. But our focus now is to crystalise our investment, grow the business, and get it to profitability,” he said.

On expansion plans into Africa, Samuels said the company was always on the lookout for big, lucrative markets.

A deal in Nigeria fell through last year, but Virgin Mobile is now trawling Egypt and Kenya for a suitable partner — without Cell C.



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Cell C’s signal fading fast