Why Telkom should buy Cell C

Telkom should buy Cell C to boost scale and extract potential synergies.

This is according to a Standard Bank Group Securities presentation from February 2019, which MyBroadband has seen.

The presentation stated that Blue Label Telecoms – a large shareholder in Cell C – had a market cap of R4.2 billion after paying R5.5 billion for its stake in the mobile operator. This means Telkom could acquire Cell C at a reasonable price.

At the time of writing, Blue Label’s market cap was around R3.5 billion – following its share price taking a hammering over the past year due to negative sentiment around its investment in Cell C.

Standard Bank’s presentation added that the return on investment for companies in the local economy was inadequate to sustain four mobile operators, unless South Africa’s GDP accelerates.

It added that Telkom Mobile was not building scale quickly enough either to “generate adequate returns”.

Price drops

The pressure on mobile networks to drop data and voice prices in South Africa is another concern for operators.

“Cell C’s operating and financial risk is rising as MNOs (mobile network operators) reduce voice and data pricing, without accelerating GDP growth,” states the presentation.

It added that Telkom is also uniquely positioned to create shareholder value given the expected increase in customer scale and on-net calling volumes.

There would be further efficiency gains when it comes to handset procurement and a reduction in Cell C’s reliance on tower leasing.

A reduction of “duplicate marketing, administration, managerial, and billing infrastructure” would be an additional benefit of the acquisition, along with the usage of complementary spectrum allocations.

This could amount to the following savings:

  • Cell C’s staff costs of R1.05 billion annually may be reduced by R500 million by removing duplicate staff.
  • Marketing spend would be reduced by R200 million annually.
  • Tower lease costs would be lowered by R100 million in 2019 – currently at R1 billion.
  • Roaming savings of R200 million would take place in 2019.
  • A head office rationalization of R100 million would be realised.

Spectrum

On the subject of spectrum, the presentation predicted that if Telkom acquired Cell C, ICASA would approve the deal – but insist that Cell C give back its 1,800MHz spectrum.

This is because the combined entity would have twice the 1,800MHz spectrum currently allocated to Vodacom and MTN, while Telkom would benefit from Cell C’s 900MHz spectrum – as it does not have its own.

Approval from the Competition Commision was also predicted, as the two networks’ combined market share would still be below that of Vodacom and MTN.

The price

The Standard Bank presentation stated that a 100% acquisition of Cell C by Telkom would cost R12.2 billion – with an enterprise value of R20.9 billion.

Telkom would also assume Cell C’s interest-bearing debt, and would cease to pay a dividend to “commence debt repayments”.

This is not the first time Telkom buying Cell C has been suggested, and as recently as December 2018 industry insiders were talking about a potential deal.

Following this, it was reported at the end of February 2019 that Blue Label was looking for new investors in Cell C.

Now read: MTN South Africa – Big subscriber and data growth

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Why Telkom should buy Cell C