Serious warning about one of South Africa’s top companies

Shane Watkins from All Weather Capital warned that investors should be concerned about corporate governance issues at Blue Label Telecoms.

Blue Label denied that there should be concerns, saying all transactions between related parties follow stringent corporate governance processes.

Blue Label Telecoms is one of the largest telecommunications and IT companies in South Africa, best known for its prepaid products.

It helps companies to sell prepaid airtime, electricity tokens, event tickets, mobile starter packs, and vouchers.

It was listed on the Johannesburg Stock Exchange (JSE) in 2007, and its share price grew by 144% over the next decade.

However, one decision crushed the company. Blue Label acquired a 45% stake in Cell C for R5.5 billion in August 2017.

Cell C, which was already struggling at the time of the acquisition, continued to deteriorate, and Blue Label ultimately had to write down its investment to nil.

The Cell C debacle caused Blue Label’s share price to plummet by over 90%, destroying R16 billion in shareholder value.

Despite the tremendous financial pain, Blue Label doubled down on its Cell C investment and launched another recapitalisation and turnaround plan.

The latest recapitalisation saw Blue Label, through the wholly owned The Prepaid Company, lend Cell C R1.03 billion to pay off debt claims and purchased R2.4 billion in airtime.

Blue Label’s latest financial results revealed that The Prepaid Company has a 63.19% economic interest in Cell C, much higher than the previous 45%.

To gain full control over Cell C, Blue Label Telecoms applied to transfer Cell C’s telecommunications licenses to The Prepaid Company.

On 24 January 2025, the Independent Communications Authority of South Africa (ICASA) approved the transfer.

Cell C also has a new chief executive, Jorge Mendes, who appointed a new management team to steer the company’s turnaround strategy.

Mendes and Blue Label co-CEOs Brett and Mark Levy are optimistic about Cell C’s prospects despite its previous struggles.

“We are optimistic about the positive signs of change at Cell C evidenced over the past year. Efforts to stabilise the company are clearly starting to bear fruit,” they said.

“The new leadership team brings a wealth of experience and a strong focus on greater operational rigour and governance.”

Blue Label investment commentary

Blue Label Telecoms reported a decline in group revenue and gross profit over the last financial year. Group revenue declined by R4.3 billion (23%) to R14.6 billion.

Gross profit decreased by R188 million from R3.483 billion to R3.295 billion. An increase in the gross profit margin mitigated the decline.

Earnings before interest, taxes, depreciation, and amortisation (EBITDA) declined by R258 million from R1.463 billion to R1.205 billion.

Despite the downward trend over the last financial year, many investors are upbeat about Cell C’s prospects under Mendes.

The Blue Label share price increased by 91% over the last year, which shows the positive momentum behind the company from investors.

However, not everyone is upbeat about Blue Label’s prospects. Shane Watkins from All Weather Capital warned that investors may face nasty surprises.

He told Business Day TV Blue Label’s core operations, selling vouchers and prepaid products, is a quality business.

However, its majority stake in Cell C carries risk. “A fourth operator in a country is never going to make money,” he said.

The biggest problem is governance. “There have been allegations linked to related party transactions between the management and Cell C,” Watkins said.

“The risk you take by investing in Blue Label Telecoms is corporate governance risk instead of operational risk.”

Another prominent analyst, who asked to remain anonymous, said they have also flagged corporate governance and accounting issues at Blue Label.

He told BusinessTech that they would have shorted Blue Label if it were not for the unpredictable share price moves.

Highly complicated finances

Blue Label’s financial statements and reports are notoriously complicated, convoluted, and difficult to understand.

After the Cell C acquisition, matters became worse. Blue Label created various special purpose vehicles (SPVs) with different functions.

The main aim of the numerous SPVs is to reduce Cell C’s credit risk, increase its liquidity, and restructure its financing. 

The sheer vastness and complexity of these SPVs make following Cell C and Blue Label’s performance extremely difficult.

Sasfin Securities’ David Shapiro also previously explained that the Blue Label results are very difficult to understand.

“The structure of the loans is difficult to understand. To get the large amount of cash for Cell C, they had to do all kinds of financial engineering,” he said.

Shapiro said he did not want to be negative in any way, but it is very difficult for any person to grasp what is really going on.

Wayne McCurrie, formerly from FNB Wealth and Investments, also said it is difficult to understand Blue Label’s results, even for financial professionals.

He joked that it would take a chartered accountant two years to understand the loans, special purpose vehicles, and guarantees related to Cell C.

Blue Label Telecoms responds

Blue Label Telecoms responded, saying all transactions between related parties are conducted following stringent corporate governance processes.

“We adhere to rigorous protocols that ensure transparency and accountability,” the company told BusinessTech.

Additionally, established distribution agreements govern the commercial arrangements between Cell C and the Blue Label Group.

These established distribution agreements further reinforce Blue Label’s commitment to ethical business practices, it said.

“At the same time, we understand that clarity and transparency of financial information are crucial for our stakeholders,” it said.

Blue Label said that it endeavours at all times to simplify the information to investors where possible.

It added that the complexity of its financial reporting arises from the intricate nature of the commercial transactions associated with the Cell C recapitalisation transaction.

“We recognise that these transactions can be challenging to understand, which is why we have made concerted efforts to explain them in a simplified manner,” it said.

It said its goal is to provide stakeholders with clarity and transparency while complying with IFRS accounting standards.

“We have taken steps to simplify our financial reporting for the six-month period ended 30 November 2024, scheduled for release on Thursday 20 February,” it said.

“We are committed to maintaining high standards of corporate governance and financial integrity.”

“We will engage directly with All Weather Capital during our post-results investor roadshow, which will hopefully provide the opportunity to offer further clarity.”