Cell C could be a great buy for Telkom

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Cell C, ‘the champion of the consumer’ could soon have a new owner – a “potential” buyer has already advised investors of ongoing talks for the purchase of a majority stake in the country’s third mobile phone operator. By Gugu Lourie


Last month, Dubai-based Oger Telecom – Cell C’s parent company – put up a “for-sale sign” at the company’s Midrand offices.

While there have been as many as six suitors, Telkom has emerged as a front runner, especially after the leading fixed line operator issued a “cautionary announcement” to shareholders on Monday. The suggestion was that Telkom was about to secure a deal to acquire a majority stake in Cell C.

With nothing to indicate that the assumption is far-fetched it appears Cell C may disappear as a brand and could in all likelihood be re-branded into Telkom Mobile.

Telkom Phone Booth
Telkom Phone Booth

Sceptics, however, say “that’s a pipe dream,” because over the years Cell C has been built into one of the most exciting brands in South Africa.

They also surmise that Telkom cannot possibly afford to buy Cell C after it bought technology firm Business Connexion (BCX) for R2.7 billion. In addition Telkom has spent millions of rand on voluntary retrenchments.

Nonetheless, it is a known fact by now that Telkom regards Cell C as an asset that could provide their mobile business with scalability.

On the other hand, it seems as if the boss of Cell C is more than keen to sell his firm to Telkom. Jose Dos Santos, Cell C’s CEO, recently stated that “if Telkom want us, they must write out a cheque”.

Neither company has confirmed official talks, but all the signs point to a possible deal.

The announcement by Telkom to investors on Monday has fuelled the speculation further.

Bloomberg sources are saying Oger Telecom has put a R20 billion price tag on Cell C.

But could Telkom really afford that price tag?

The answers is yes.

Telkom may opt to initiate a rights issue to raise cash to fund the deal, but this may be unpopular with certain investors, who may not want to dilute their shares. However, Telkom may perhaps also decide to go for a simple route: share placing, which would mean approaching its top institutional investors to take up the rights issue to buy Cell C.

In the past Telkom’s gaffes in buying companies were because the telco was not buying capability – it tended to overpay for assets just to get a foothold in a particular market.

A case in point is the hasty expansion into Nigeria, where Telkom bought MultiLinks, a technology business that was in tatters. It was eventually written-down by R5.2 billion in 2010.

In 2013 Telkom also sold its pan-African business, iWayAfrica and Africa Online, after the operations failed for years to deliver expected profits.

This was also an acquisition based on an exuberance just to expand into Africa and conquer it without buying proper capability. The company also ventured into trying to set up a pay-TV unit known as Telkom Media, which was shut down in 2009 after throwing billions into the drain.

That said, it seems the new leadership at Telkom under the stewardship of Sipho Maseko has exhibited prudence. They know not to acquire companies at great cost for the sake of trying to compete and please the market.

Telkom is now buying assets based on their capability.

 

Sipho Maseko, Telkom chief executive
Sipho Maseko, Telkom chief executive

 

A case in point, it has acquired BCX for its technology capability and its fully-fledged Africa footprint that is profitable.

Now Telkom will need to support the strategy and management of BCX, and find ways to tap into the firms’ expertise. BCX will yet prove to be a good buy as Telkom stands to get a consistent dividend from the technology firm.

Furthermore, it will be a great move if the unspecified discussions by Telkom are indeed related to the purchase of a majority stake in Cell C.

Buying Cell C will be equivalent to acquiring another capability that Telkom failed to build, even though it had billions of rand from selling its stake in Vodacom in 2008.

Telkom’s mobile business, which use to be called 8ta, has failed dismally to challenge the duopoly of incumbents, Vodacom and MTN.

Instead, Cell C has managed to shake-up the market and steal customers from MTN and Vodacom.

A deal with Cell C will enable Telkom to complete the puzzle in its strategy to be a fully converged player.

Firstly, Cell C is actually a decent company these days.

It is innovative when it comes to products and services.

On October 1, Cell C commercially launched its LTE or a faster wireless internet access services to subscribers.

Jose Dos Santos, Cell C's CEO
Jose Dos Santos, Cell C’s CEO

The operator offered 1000 customers in Gauteng and 500 in KwaZulu-Natal the chance to buy 100GB of data, valid for three months, at only R100.

The company also houses – in its network – various mobile virtual network operators including Virgin Mobile and FNB Connect.

Furthermore, Cell C has more than 20 million subscribers and that number is likely to increase dramatically taking into consideration the number of potential customers that responded to its LTE services for 100GB at R100.

There were thousands of people queuing to be one of the 1000 customers to get their hands on the LTE sim card at Cell C’s Midrand headquarters.

Secondly, a Telkom merger with Cell C will create a profitable third mobile operator with scale.

In addition, Cell C’s black investors could shape a new shareholding structure for Telkom by buying a further stake in the fixed-line telephone group.

Telkom is still seeking ways to comply with the ownership pillar of the black economic empowerment rules.

That said, it would be strategic for Telkom to buy Cell C and use its offer of competitively priced LTE bundles to its mobile and landline customers.

Cell C customers could also help Telkom grow its fibre-to-the-home and wireless broadband businesses.

Besides, Cell C needs a local company to remain competitive.

Interesting times lie ahead.


 

 

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