Cell C was a bad investment: Blue Label
Blue Label Telecom co-chief executive officer Brett Levy admits that the company’s investment into Cell C was a bad move for the group, but he remains hopeful that the operator can turn things around as it hunts for a new equity partner.
After delaying its results for a number of weeks, Blue Label published its full year results at the end of September, reporting a decline in earnings for the year ended May 2019, including a 3% drop in group revenue to R25.9 billion as losses incurred by Cell C weighed.
Cell C’s losses, which totalled R8 billion, amounted to R3.6 billion for Blue Label directly, as the company has a 45% stake in the operator.
As a result, Blue Label reported a headline loss of 312.49 cents per share, and a core headline loss of 304.77 cents per share.
Although the core businesses of the Blue Label Group continued to generate profit, the predominant negative contributions to group earnings were attributable to Cell C.
“It is evident that the investment in Cell C had a significant negative impact on group earnings,” Blue Label said at the time.
Bad investment
In an interview with CNBC Africa, Levy was asked directly whether Cell C was a bad investment.
“It’s a hard question. I think it’s been a hard 12 months,” he said.
“At the time we went in eyes wide open – we did the right due diligence, we got a team from London and PwC to help us. So I think the reason for doing the deal was all good, and for the right reason,” Levy said.
“But I think in hindsight, of course it has been a bad investment. Our share price speaks for itself.”
When Blue Label acquired its stake in Cell C in August 2017, the group’s share price was sitting around R16.50. In the two years since, it has fallen 84% to R2.60.
Levy said that the core of Blue Label’s business has done really well – but where the company would have usually seen the benefit of these core operations, it has now seen the opposite due to Cell C.
“Unfortunately it has been a bad one. But we’ve drawn a line in the sand now, and hopefully we can turn it around,” he said.
The line in the sand, Levy said, was writing off Blue Label’s entire investment in Cell C to zero. He said that the write off wasn’t because the group believes Cell C won’t make it, or that there is no opportunity in the network operator, but it was a necessity in terms of the group’s finances.
“Although this isn’t a good thing for us, the good thing about it is that it’s the bottom for us, and if we can turn (Cell C) around and deliver what we’ve promised on, well then it’s only upside for us,” he said.
Regarding Cell C’s debt and losses, Levy said that the recapitalisation plans would address this, with the company close to sealing the deal with a network partner which will set it on the right path.
Levy said that the partner was not China Mobile.
“I read the news reports. If they (China Mobile) are shopping around, it definitely isn’t something that has come to us as the main shareholder yet,” he said. “There is a lot of interest in Cell C – a lot more than people think – but China Mobile specifically? No, that hasn’t come to the shareholders.”
Levy insisted that Blue Label wasn’t misled about the business case for Cell C in any way, but in its due diligence and recapitalisation projection was more optimistic than it should have been.
“It should have gone on much more of a worst-case scenario,” he said. “In the last 18 months, which I don’t think anyone could have anticipated, was an absolute change in the market itself. Telkom, doing a really good job at what they set themselves out to do, brought an absolute change in the market.”
“That, and not meeting the budget that were set out in the recapitalisation has put us in this position.”
Levy said that it was always part of the plan to engage in a second recapitalisation of Cell C, however, and that was something that was communicated to shareholders from the beginning.
This was envisioned to either be through an equity partner, or via a listing on the stock markets.
“The 2019/2020 position is an indication of this second phase of recapitalisation, so in that sense we are almost spot-on in what we said. The condition that Cell C is in, that is obviously different,” he said.
Read: Cell C puts core parts of business up for sale: report
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