Telkom in talks to buy Cell C

Telkom in talks to buy Cell C

Image: iStock

The state-owned telecoms company wants to combine SA’s two smallest networks into a big one, but could end up assuming Cell C’s debt in the process.

Telkom has confirmed that it is in discussions over “the potential acquisition of” Cell C.

“Telkom has substantially concluded its due diligence, however, discussions are at a preliminary stage,” a cautionary announcement from the state-owned telecommunications company says.

The state-owned telecommunications company wants to combine Telkom Mobile and Cell C – the country’s two smallest mobile networks, into a large network which could compete with the pair’s biggest rivals – Vodacom and MTN.

This comes as talks between Cell C and MTN are at an advanced stage, with the cellular giant as well as local investment company the Buffett Consortium negotiating possibly recapitalising the company and selling off some of its assets.

Cell C has released a statement on the MTN talks but has declined to comment on Telkom thus far.

“Cell C remains focused on ensuring operational efficiencies, restructuring its balance sheet, implementing a revised network strategy and improving overall liquidity,” the statement says.

“Cell C will look at any opportunity that will assist with the company’s long-term viability. Any opportunity will need to undergo a due-diligence process that takes into account all stakeholders.”

According to Telkom, they will only buy the network if it completes “a financial restructuring to ensure that its gearing levels are reduced to a sustainable level as specified by Telkom”.Telkom also wants “commercial contractual relationships” to be “renegotiated to terms acceptable to Telkom and says the acquisition “will be subject to a number of regulatory approvals”.

“The potential acquisition, if concluded, may have a material effect on the price of the company’s
securities.

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“Accordingly, shareholders are advised to continue to exercise caution when dealing in the company’s securities until a further announcement is made.”

Telkom attempted to purchase Cell C before, in 2017.

Moneyweb‘s Hilton Tarrant believes that “Cell C is arguably in worse shape today than it was two years ago when Telkom tried and failed.”

The company is in significant debt.

“Any deal for Cell C has to resolve its ±R9 billion debt problem, which is ±R1.5 billion larger than it was last May,” Tarrant writes.

“Revenue and subscriber growth has flatlined – and earnings before interest, taxes, depreciation, and amortisation (Ebitda) for the 12 months to end-May 2019 [aligned with the year-end of Blue Label Telecoms] was down 19%.

“In this period, Cell C’s net loss before tax was R3.8 billion. The fundamental problem, even post recapitalisation, remains Cell C’s debt. At that point, it was R8.9 billion, 19% higher than a year prior. Net finance costs were R2.15 billion in the 12-month period.

“It is not a stretch to suggest that Telkom’s mobile service revenue for the full year to end-March 2020 will be higher than Cell C’s for the same period. Further direct comparisons are difficult because of the way Telkom has restructured its business (its tower portfolio sits under Gyro, and its core network, including fibre backhaul from towers, sits inside Openserve).”

Moneyweb’s full report can be read here.

(Compiled by Daniel Friedman. Background reporting, Hilton Tarrant)

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