SA's Blue Label Telecoms seeks control of Cell C

South African company Blue Label Telecoms' interim earnings have been negatively impacted by its investment in local mobile operator, Cell C, and it has intentions to take control of the operator in the coming months.

Johannesburg-listed Blue Label released its interim results for the six months to the end of November 2022 on Thursday, which show that core headline earnings per share (a key profit measure in South Africa) dropped by over 90% year-on-year (YoY) with a major factor being the recapitalization of Cell C that was concluded in September 2022.

However, it said that if the major cost of the Cell C recapitalization had been excluded, core headline earnings per share would have increased by 13%.

Excluding the "extraneous costs" in the current and prior period, earnings before interest, tax, depreciation and amortization (EBITDA) increased by 15% for the half year.

Revenue for the six months climbed by 8% YoY to R9.8 billion (US$534 million), while the gross profit margin expanded from 14.93% to 15.67% .

Source: Blue Label Telecoms interim results presentation for the six months ended November 2022.

In August 2017, Blue Label bought a 45% stake in Cell C for R5.5 billion (US$330 million). But, by the end of 2019, it had to write down the value of its entire investment in Cell C to zero.

Blue Label's investment was part of Cell C's first recapitalization. But the telco has faced serious financial challenges and spent about four years working on the second recapitalization as a way reduce its debt and help stabilize the company.

After the September recap Blue Label subsidiary, The Prepaid Company, now holds a 49.53% stake in Cell C.

Seeking control

"It is our intention to pursue [taking control of Cell C], as a board we believe that it's the right direction to go. We will definitely be looking at the possibility of taking control of Cell C," Blue Label joint-CEO Brett Levy told journalists at the results presentation on Thursday.

He said a decision on this would be made over the next few months.

"The reason for it is we are in no man's land now. We have a big percentage [of Cell C], but we don't have control. We have the majority of the debt, but we don't have control. So, it's not an ideal position to be in. You actually have to make one or two choices; you have to sell down or buy up, but you can't stay in the same position," he added.

Post recapitalization the value of 100% of Cell C is R3.1 billion (US$169 million), and Blue Label's share is R1.5 billion (US$82 million). Levy said Blue Label applied a 35% discount to that value in its books which values its investment at around R900 million (US$49 million).

Source: Blue Label Telecoms interim results presentation for the six months ended November 2022.

He said Blue Label is now taking a much longer view on Cell C, and a much more conservative view.

"The positive is the recapitalization is now done and we have brought back the value of Cell C."

"We look forward to seeing what Cell C can do over the next 12 or 24 months. It's not plain sailing for Cell C however, it's not that the recap is done, and now we shoot the lights out at all. I think the difference is, for the first time we really know where we fit in this market as Cell C, we really have a clear strategy. We really have a clear vision of what Cell C should be," he said.

Network strategy

Over the past two years, Cell C has taken the strategy to no longer run its own towers and network and rather roam on other operator networks in South Africa.

In October 2022, Cell C had migrated 61% of its network to partner towers and Levy said that the network would be 100% migrated by the end of June 2023.

"This means we just don't have the same headaches as the other networks. So, the strategy of transitioning our network was really a good strategy. I think there is only really room for two networks [in SA] - Vodacom and MTN - and the rest will have to do roaming deals similar to us," Levy said.

Blue Label cut its teeth as a distributor of airtime and data vouchers for all of SA's telecoms operators and has shown strong success in the informal sector over the years. Since then, it has expanded into distribution of other third-party prepaid products like electricity and ticketing for transport, gaming and events.

If you exclude the Cell C debacle, Blue Label put out a decent set of interim results with good growth across its electricity, ticketing and gaming businesses.

Load shedding hits hard

The electricity business saw revenue grow by 7% YoY for the half year, which was a slowdown from previous years as the impact of ongoing power cuts, known locally as load shedding, impacted prepaid electricity sales.

"We have been up in double digit figures year-on-year for many years, and we should have been up in double digit figures for this year as well, as indicated to the market. For the first time ever in the history of our electricity business we saw load shedding impact it really hard. However we are still growing and [the electricity segment] still outperforms, it's still a great division in Blue Label," Levy said.

Joint-CEO Mark Levy said that on average prepaid electricity users are losing between eight and 13 days a month of electricity due to blackouts and so Blue Label sales in prepaid vouchers have been impacted.

In April, Blue Label plans to launch a whole new category in its postpaid business aimed at South Africa's power issues - a new range of product including generators, inverters and batteries.

"On the gaming side, it's really on fire. We grew it from around R900 million (US$49 million) in revenue in the period before to R1.5 billion (US$82 million). So really growing at a rapid pace and we do not see any slowdown on the gaming side. We project for the next six months, something really similar," Brett Levy concluded.

Source: Blue Label Telecoms interim results presentation for the six months ended November 2022.

*Top image is of Blue Label Telecoms joint-CEOs Mark and Brett Levy. (Source: Blue Label Telecoms).

— Paula Gilbert, Editor, Connecting Africa