Cell C deal is off the table, Telkom gains
Telkom, the partially state-owned telecom firm, closed at R46.89 a share on Friday, after it said that it had received written notice from the Cell C board of directors rejecting its non-binding proposal.
“The Telkom board continues to believe the offer is a compelling proposition that would have created significant value for all stakeholders including Telkom’s shareholders,” the company said.
Ofentse Dazela, a director of pricing research at Johannesburg-based Africa Analysis, said the biggest issue was that Telkom approached Cell C with an onerous condition that it needed to reduce its R9 billion debt to acceptable levels.
“This is rather peculiar, given that Cell C’s financial challenges have been well documented in recent months.
"Telkom most probably sought to take over Cell C for a pittance if it failed to meet this condition, something that Cell C’s board, and in particular BLT (Blue Label Telecoms) likely vehemently opposed,” Dazela said.
Cell C is 45 percent owned by JSE-listed Blue Label Telecoms and is South Africa’s third-biggest mobile operator.
Last month, Telkom confirmed that it was in talks to take over Cell C subject to conditions, including that it finalised its restructuring plan that addressed its debt burden.
Dazela said the rejection had been expected given that Telkom made its bid at the time Cell C had already announced and made significant changes to its operations to steady the ship somewhat.
“Notably, Cell C has already concluded a new cost-saving roaming agreement with MTN that will lessen capex burden on the company, while also extending its 4G population coverage to an impressive 95 percent,” Dazela said.
Dazela believed if Cell C still had an appetite to continue with its plan to run the country’s biggest mobile virtual network operator, there was a pretty good chance that they opted to partner with MTN.
“This roaming deal likely came with favourable terms for Cell C, which is also planning to discontinue the cash-burning content service Black by the end of this year as part of its broader turnaround strategy,” said Dazela.
Peter Takaendesa, a portfolio manager at Cape Town-based Mergence Investment Managers, said the positive share price reaction on Friday probably signalled that Telkom investors were concerned about the company potentially raising balance sheet risk or diluting existing investors by issuing equity-linked instruments to fund the Cell C acquisition.
Takaendesa agreed with Dazela, saying that it was very likely that both parties had failed to agree on the pricing of the proposed deal and some of the restructuring conditions that Telkom had put on the table.
“Telkom is also not in a position to pay up more for Cell C, as that would increase risk on their balance sheet and they have another option to apply for new low-band spectrum to keep growing their mobile business organically.”