Cell C Recapitalisation is Not a Done Deal, warns BEE Partner CellSAf

The restructuring amounts to a blatant attempt at corporate capture, and is likely to collapse under regulatory scrutiny.

Cell C Head Office
Cell C Head Office (Photo Credit: Atterbury)

By Staff Writer

Cell C’s black economic empowerment shareholder, CellSAf, which currently holds 25% of South Africa’s third largest mobile operator, has warned that the restructuring of the mobile phone operator is far from a “done deal”.

The country’s third-biggest mobile phone operator recently announced its restructuring involving Net 1 and Blue Label Telecoms.

The Cell C’s empowerment partner declared that the recapitalisation of the mobile phone operator amounts to a blatant attempt at corporate capture, and is likely to collapse under regulatory scrutiny.

CellSAf founded Cell C 16 years ago along with the now-bankrupt Middle-Eastern conglomerate, Saudi Oger.

After more than 2 years of obfuscation, secret negotiations and numerous contraventions of the Companies Act, Cell C management, Net 1 and Blue Label announced the conclusion and “approval” of the recapitalisation transaction on 07 August 2017, CellSAf said in a statement on Wednesday.

Acting as though the deal was a fait accompli, CellSAf said Cell C announced on Monday that Kuben Pillay and Larry Nestadt have been appointed to the board of Cell C as chairperson and deputy chairperson respectively.

“In fact, the proposed restructuring is non-compliant and faces a number of legal and regulatory hurdles. Faced with regulatory and public scrutiny, the true motives and beneficiaries of the proposed transaction will be revealed,” Dr. Nomonde Mabuya, CellSAf’s company secretary said on behalf of the board of the empowerment firm.

“These revelations, combined with a series of violations of Cell C’s license conditions, several South African laws and regulations, will likely capsize the deal, leaving its backers to rehabilitate their reputations and CellSAf to pick up the pieces at Cell C. “

Compromised, from start to finish

CellSAf claimed that the proposed transaction is compromised on multiple levels:

  • It does not comply with various provisions of the Companies Act, the Electronic Communications Act or the Competition Act.   The sponsors of the transaction have not complied with the mandated regulatory processes relating to changes in control of a License, and they are therefore in breach of the specific requirements, regulated by the Independent Communications Authority of South Africa (ICASA).
  • The sponsors have not complied with the requirements relating to a merger of this nature, and potentially face an investigation by the Competition Commission relating, inter alia, to the prior implementation of a large merger.
  • The transaction requires approval by the Financial Surveillance Board (FSB) of the South African Reserve Bank (SARB) and Cell C is currently facing scrutiny by SARS, relating to VAT, thin capitalisation and transfer pricing. This transaction will further impact the audit of Cell C’s affairs, underway since June 2017.
  • The processes undertaken in negotiating and announcing the transaction appear to flout the rules of several stock and bond exchanges, potentially exposing the participants to regulatory action both in South Africa and elsewhere.
  • The deal falls foul of broad imperatives and the anti-fronting prescriptions of the South African Broad-Based Black Economic Empowerment (B-BBEE) Act.
  • The deal was negotiated behind closed doors and appears motivated purely by the self-interest of the participants. The process illegally excluded CellSAf from decision-making, involved multiple undeclared conflicts of interest; and breaches of fiduciary obligations; and, was approved by improperly-constituted Boards of Directors, relying on irregular resolutions. CellSAf has launched a High Court Application to have the resolutions and agreements set aside. The matter will come before the Court in the near future.

“By continuing to misrepresent the status of the transaction to the market in order to mask their own, reckless and negligent conduct, Cell C management, Net 1 and Blue Label are exposing themselves and their shareholders to significant risks and costs, as well as exposing the entire sector to unnecessary and potentially damaging instability,” said Dr. Mabuya.

Not in Cell C’s interest

Cell C Campus - Waterfall City waterfallcity.co.za
Cell C Campus – Waterfall City

On August 10, Minister of Telecommunications and Postal Services Siyabonga Cwele applauded Cell C’s R5.5 billion recapitalisation, saying the deal saves Cell C and prevents the monopolisation of the telecommunications industry.

“We call upon Cell C management to prioritise transformation, job creation and join our partnership to ensure that all South Africans are connected to affordable and reliable internet by the end of 2020,” said Minister Cwele.

However, CellSAf said in addition to fatal procedural and regulatory defects, the proposed deal doesn’t benefit Cell C or South Africa.

In fact, contrary to the public statements by participants in the deal, CellSAf added that the restructuring appears to have been expressly designed to benefit Cell C management, Net1 and Blue Label, to the detriment of the company and its stakeholders.

“There was no imminent threat of liquidation of Cell C, nor were any attempts made to determine whether Cell C was in a distressed situation or to follow due process in identifying the best possible outcome for Cell C,” said Dr. Mabuya.

She added that the recapitalisation does not save jobs – instead, Blue Label and its associates have been taking jobs away from Cell C, its franchisees, distributors, WASPs and other major suppliers for over two years and would continue to do so if the deal were implemented. Should the transaction not pass regulatory muster, it will be left to Cell C’s original shareholders to pick up the pieces and protect jobs.

Despite being allocated 70% of the company under this scheme, the R7.5 billion invested by Blue Label and Net 1 and the R2,500 (two thousand five hundred rand) invested by the 4 members of Cell C’s Management does not reduce Cell C’s purported R23 billion debt to R6 billion, claimed Dr Mabuza.

“In fact it is 3C Telecommunications (“3C”), the original 100% shareholder of Cell C, which now includes CellSAf and Cell C staff (90% of whom are HDI), who are expected to inherit R9 billion of Cell C’s debt via three new SPVs,” she said.

“The intention is clearly to saddle 3C, CellSAf  and Cell C staff with debt, whilst future returns are funnelled to “new” shareholders.”

“The transaction provides positive shareholder value only to the new shareholders, while leaving 3C and Cell C staff with massive negative value that is unsustainable. Even based on the implied valuation of R12.2 billion (implied by Blue Label’s acquisition of 45% for R5.5 billion), 3C’s residual 30% shareholding in Cell C would be valued at R3.67 billion, well below the new R9 billion in debt it has been forced to “uplift” from Cell C, which has to be added to 3C’s existing debt of R15.5 billion.”

Cell C’s historically disadvantaged (HDI) ownership has not increased to more than 30% as claimed, argued  CellSAf.

“In fact, careful scrutiny of the deal reveals that HDI shareholding will reduce from a mandatory, licenced condition of 25% (legally held by CellSAf), to less than 20%. The only way in which this would not be the case is if the entire recent placement of shares by Blue Label (for R2.75 billion) turns out to be for the benefit of HDIs. This does not appear to be the case,” said Dr Mabuya.

“ In fact, the beneficiaries of the proposed deal, who stand to rake in billions of rands, are the white, privileged majority shareholders of Blue Label Telecoms, the foreign-owned Net1, the handful of white males in Cell C’s management team and established financial backers (including Investec Bank and Rand Merchant Bank).”

A better deal

CellSAf added that it is confident that this blatant attempt to hijack Cell C will be shunned by South Africa’s courts and regulators, paving the way for an appropriate, compliant, legal and transparent capital restructuring that enhances the value of Cell C and its legitimate shareholders.

CellSAf said it will continue to work with regulators and other partners, both in South Africa and elsewhere, in order to expedite this process.



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