JSE-listed technology firm Blue Label Telecoms has once again raised questions about its financial dealings with struggling mobile operator Cell C, as its latest financial results reveal continued transactions involving its subsidiaries, Comm Equipment Company (CEC) and The Prepaid Company (TPC).
These transactions involve substantial airtime purchases, prompting scrutiny over whether Cell C is being financed in an unconventional manner.
Strange airtime purchases to ‘fund’ Cell C
In its latest financial report, Blue Label disclosed that TPC now holds either a 53.57% or 63.19% stake in Cell C.
The ambiguity around this ownership raises a fundamental question: Is Cell C a subsidiary or merely an associate company of Blue Label?
Is the situation reminiscent of a 2017 Mail & Guardian (M&G) investigation titled “How Cell C Was Bought with Its Own Airtime.”
The M&G article revealed that during a R13.5 billion recapitalisation of Cell C, a key financing mechanism involved the purchase of R2.5 billion worth of Cell C’s own airtime, which was then used to fund Blue Label’s acquisition of a major stake in the company.
The article suggested that this complex structure amounted to a financial “magic trick,” allowing Blue Label to effectively purchase Cell C using the mobile operator’s own revenue streams.
Latest financial disclosures raise new concerns
Blue Label’s latest results show a decline in EBITDA (earnings before interest, tax, depreciation, and amortisation), which fell by R44 million (6%) for the six months ending 30 November 2024, from R697 million to R653 million.
The group’s core headline earnings saw a marginal increase of R5 million from R419 million to R424 million.
The decline in EBITDA and modest earnings growth were attributed to:
- A reduction in the CEC subscriber base.
- A lower average revenue per user (ARPU).
- Increased finance costs from selling a portion of the CEC handset receivable book
Most notably, the proceeds from these transactions were transferred from CEC to TPC and ultimately to Cell C through the acquisition of airtime, echoing past concerns about the financial engineering behind Cell C’s funding structure.
Bulk airtime purchases: a recurring theme
Blue Label’s results highlight that TPC was obligated to make significant airtime purchases from Cell C:
- Quarterly payments of R300 million (including VAT), with each payment securing additional prepaid airtime with a face value of R500 million (including VAT). These payments were scheduled over four quarters, starting in October 2023, with the final payment occurring in November 2024.
- Minimum monthly purchases of airtime vouchers for 24 months post-recapitalisation:
- For the first 12 months: R427 million (including VAT) per month.
- For the next 12 months: R378 million (including VAT) per month.
- The cash purchase price was set at a discount of 6% to the face value until January 2024, reducing to a 4% discount thereafter.
- These minimum monthly purchases were reduced by R125 million per month until TPC’s airtime repurchase obligation to funders was settled.
Additionally, if Cell C’s MVNO (mobile virtual network operator) revenue exceeded agreed thresholds, TPC’s minimum purchase requirements would be reduced.
TPC’s borrowing strategy: more airtime transactions
Since Cell C’s recapitalisation, TPC has been involved in airtime repurchase agreements with its lenders:
- 48 tranches of inventory repurchases totaling R2.115 billion (including VAT), for a cash consideration of R1.942 billion.
- An April 2024 transaction where TPC purchased R375 million worth of airtime (including VAT) from Cell C for R300 million, then sold the inventory to lenders, with an obligation to repurchase it between April 2024 and February 2025.
- As of 30 November 2024, R145 million worth of inventory remains restricted as it is held by funders under the repurchase agreement, with an obligation to repurchase it by 28 February 2025.
Is Cell C being propped up by airtime purchases?
These ongoing transactions raise significant questions about the true nature of Blue Label’s financial relationship with Cell C.
Is Cell C being artificially sustained through a continuous cycle of bulk airtime purchases that effectively act as indirect financing?
Or is this a legitimate business strategy for stabilising the company?
One wonders if these financial exercises bear a striking resemblance to the 2017 deal that led to concerns about Cell C being “bought with its own airtime.”
With TPC and CEC deeply entangled in these transactions, investors and industry observers should continue to watch closely to determine whether this is a sustainable strategy or merely another instance of complex corporate structuring designed to keep Cell C afloat?
