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Cell C may fetch a higher price
Cards to the chest: CEO Sipho Maseko said on Friday Telkom had approached Cell C with a price for its operation but would not disclose the amount.
Fixed-line operator Telkom may find itself having to pay much more for Cell C now that the latter’s extended roaming agreement with MTN has been concluded.
Fixed-line operator Telkom may find itself having to pay much more for Cell C now that the latter’s extended roaming agreement with MTN has been concluded, an analyst says.
Cell C and MTN said on Monday they had reached a 10-year deal that will give Cell C access to MTN’s network for voice and data services across SA.
Telkom says the potential acquisition is an opportunity to create a competitive third telecom operator in the SA mobile market. Joining forces in the potential deal, Telkom said, would allow the operators to integrate their networks as well as save on individual capital and operating costs.
Cell C has battled with total debt of about R8.9bn. Its rescue has proved to be disastrous for its two largest shareholders, Blue Label Telecoms and Net1, as the cellphone operator has failed to make inroads against bigger rivals MTN and Vodacom. Both shareholders have had to write down their combined R7.5bn investment to nil.
On a call with investors on Friday, CEO Sipho Maseko said Telkom had approached Cell C with a price for its operation but would not disclose the amount.
Philip Short, an analyst at Old Mutual, said it does not make sense for the proposed offer to have been made before the conclusion of Cell C’s recapitalisation, which would happen only after the extended roaming agreement is signed with MTN, as these factors would have a material effect on how much Telkom would have to pay for Cell C if the deal succeeded.
Up to this point, the company is said to be worth zero, said Short. “As soon as they do an MTN roaming deal, then it’s worth a lot because they no longer have to do any more capital expenditure and a lot of their costs are removed, and then their subscribers continue to give them revenue, which now translates into positive cash flow,” he said.
Peter Takaendesa, a portfolio manager at Mergence Investment Managers, has another view of the transaction.
“The investment case for Cell C remains clouded as it will depend on repairing the balance sheet, competitor activity, financial terms of the roaming agreement and the ability of the management team to align the cost base to the new operating model. The operating environment remains very challenging and execution risks are still very high,” he said.
“We believe Telkom was fully aware of this roaming agreement and must have taken it into account when they prepared an offer for Cell C. It is all going to come down to the price that Cell C shareholders will ask for and if not attractive compared to Telkom’s organic expansion plans, then the transaction will fail again in that case,” he said.
As to whether its deal with MTN will affect Telkom’s offer, Cell C simply said: “The board is continuously approached by various parties and we remain focused on executing our turnaround strategy.”
Telkom shares closed 2.06% lower on Monday at R54.73 a share.