Cell C deal remains on track after Net1 speed wobble

Cape Town – The move by Blue Label Telecoms to acquire a 45% stake in South African mobile phone operator C Cell hit a speed wobble this week after Net1 changed course as the third-party investor.

The wobble started when Net1 announced on Thursday that it was terminating its R2bn subscription of shares with Blue Label.

However, Blue Label seemed undeterred and said on Thursday that it has signed binding subscription agreements with alternative third party investors to take over that R2bn stake.

In a statement on Thursday, Net1 said it remained committed to buy its direct 15% stake in Cell C as a third party investor, which is also valued at R2bn.

It also remained committed to buy a 49.6% stake in DNI-4PL Contracts, which is a distributor of mobile subscriber starter packs for Cell C and also distributes pre-paid airtime through a network of field operatives and agents. It has the option of acquiring a controlling stake in DNI in the future.

The deal is expected to help Cell C cut its maximum net borrowings to about R6bn.

Reports emerged that Net1’s new CEO Herman Kotzé terminated the Blue Label deal on his first day on the job, after Serge Belamant stepped down amid a storm of controversy over a contract it holds to distribute billions of rand of welfare payments to 17 million people.

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However, Net1 said on Friday that the decision was taken by the board before the end of May 2017.

Net1 said the three proposed investments by Net1 required the utilisation of cash reserves, bank finance and the issuance of shares of its common stock to fund the transactions.

“The material reduction in the Net1 share price in the first five months of 2017 and the lack of volume demand for its shares at this time would have made it detrimental to Net1 shareholder value for it to proceed with a share placement,” Net1 said in a statement on Friday.

“The board accordingly concluded that Net1 could only use cash resources and bank debt and could therefore only conclude two of the three investments.”

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Net1 and Blue Label mutually agreed that Net1 would not subscribe for shares in Blue Label and would proceed only with the investments in Cell C and DNI, it said.

“Blue Label would replace the Net1 subscription with a private placement with other parties to part fund its investment in Cell C.”

Blue Label said it has “obtained irrevocable undertakings from in excess of 50% of its shareholders to vote in favour of the Cell C recapitalisation and the aforementioned vendor placements”.

Cell C was downgraded to a ‘D’ credit rating by ratings firm Standard & Poor’s - the lowest junk status rating for a corporate company - shortly after withdrawing a bond placement, stating it could reduce its maximum net borrowings to less than R8bn through planned restructuring. The bond placement process was expected to reduce Cell C's existing net borrowings to R8bn.

Cell C is South Africa's third largest mobile network with approximately 24m subscribers.

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