Cell C, once a prominent player in South Africa’s telecom industry, faces mounting problems that have cast a shadow over its future prospects, with a business model that is not sustainable.
Its recent financial results showed that the mobile phone company cost its parent group Blue Label Telecoms R600 million as part of a loan, debt-funding and reinvestment for the year ended May, and many analysts doubt its survival in the face of rising debt and a loss of subscribers.
Cell C entered the market in 2001, seven years after Vodacom and MTN, and comfortably owned the third position for a while until fixed-line operator Telkom decided to venture into the mobile space. For years now, Cell C has been meandering aimlessly and making losses in its airtime-selling business.
“Certainly for Blue Label, Cell C has been a fair bit of a disaster business. I didn’t like the transaction when Blue Label did it, it wasn’t a good transaction. Blue Label was a quality business, and I didn’t see how this particularly added value for it,” independent analyst Simon Brown said.
In 2017 the Mail & Guardian reported how Cell C was effectively bought with its own airtime. The company bought R2.5 billion worth of its own airtime from Blue Label Telecoms, which immediately used the money to fund a large part of its acquisition of a big stake in Cell C.
After first buying a 45% stake in Cell C in August 2017, Blue Label owned 49.53% of the operator after a recapitalisation in September 2022. In April this year, Blue Label acquired an additional 4.04%, bringing its total interest in Cell C to 53.7%.
The Competition Commission approved the move, saying the transaction did not raise public interest concerns. Brown said the only way to save Cell C now would be to sell it either to Telkom or MTN. But, he added, he had doubts that the Competition Commission would allow it.
“South Africa does not need four telcos. If you look at America with populations five or six times our population, that’s when you have three telcos. I don’t know that our market is big enough for four telcos, mobile operators, to stand on their own,” Brown said.
The fact that Blue Label keeps bailing out Cell C is not sustainable, he added.
“At some point, if nothing else, Blue Label will run out of money. At some point the board needs to say, hang on, we’re giving north of R200 million a year to this company. Is there an end in sight where they can start ultimately giving us R200 million from profit? If not, why are you doing it, because it makes no sense whatsoever?
“If they were to sell it to Telkom, they would realise a better value for if. Or if Cell C were to buy the Telkom mobile business, but Cell C hasn’t got the cash and Telkom wouldn’t sell. So the way it would have to work is if Telkom was to buy Cell C and merge that into its mobile offering.”
Struggling with nearly R10 billion in debt, Cell C has faced mounting financial problems, finding it hard to rein in its escalating
obligations. In its annual results, it said core headline earnings per share slid by 34% to 68.66 cents a share compared with the prior year.
As part of the recapitalisation programme it embarked on in 2022 and to further assist with its working capital requirements, Blue Label was obligated to purchase R1.2 billion of additional prepaid airtime through four quarterly payments of R300 million each.
The Cell C business was not sustainable before the recapitalisation, said Peter Takaendesa, head of equities at Mergence Investment Managers.
“The balance sheet was completely impaired and competing with MTN and Vodacom from a capital expenditure perspective without another business to lean on was never going to work,” he said.
Another problem for Cell C has been its decision not to compete in terms of capital investment and not running or building its own towers, instead relying on MTN and Vodacom.
In 2023, Cell C said it had completed its network migration, which included switching off all its tower infrastructure and handing over the building and operation of its cellular network to MTN.
MTN provides Cell C with access to a virtual radio access network for its prepaid and mobile virtual network operator (MVNO) subscribers. An MVNO is a wireless communications services provider that does not own the wireless network infrastructure over which it provides services to its customers. Mobile virtual network operators that run on Cell C include Standard Bank Mobile, FNB Connect, Shoprite K’nect and Capitec Connect.
Takaendesa said Cell C is effectively using the money it should have invested in infrastructure to buy capacity from MTN and Vodacom. Technically, this should be to Cell C’s benefit, because it can adjust the capacity it wants on a needs basis, but MTN is starting to contract with MVNOs directly and not through Cell C.
“I think it’s very likely Vodacom will also start offering one or two MVNOs on its networks.
“What you have now is a business that is fully reliant on Vodacom and MTN, yet competing with them at the same time. That is not a winning method,” Takaendesa said.
For now Cell C is probably not concerned about its future because of the sustenance from Blue Label, but for how long, remains to be seen.
“It is reliant on that funding. So, there will be someone who makes sure it survives, but for how long?” Takaendesa wondered.
