Telkom is eyeing a full takeover of Cell C as part of its plans to create a more formidable challenger to network giants Vodacom and MTN and their near duopoly over SA's mobile telecommunications.
The partially state-owned operator wants 100% of Cell C and is angling for a cashless merger, people familiar with the preliminary talks told Business Times this week.
Telkom's preference is to fund the deal by issuing shares to Cell C's owners, including Blue Label Telecoms and Net 1, the people said. The parties would need to agree on a merger ratio, or valuation for Cell C, before talks can progress.
In August last year, Blue Label bought 45% of Cell C and Net1 took on a 15% stake as part of the operator's recapitalisation deal. Telkom was keen on a Cell C takeover but was beaten to the punch. Earlier this year, the 41% state-owned network operator flirted with MTN, but those talks fizzled out.
At the time of its recapitalisation, Cell C's debts were reduced by more than R30bn, though analysts are still wary about the operator's financial position as it is projected to end 2019 with about R9bn in net debt.
Doing a share swap, rather than paying upfront for Cell C, would free up cash for capital expenditure, the sources said. The combined entities would have a stronger consumer business — with 22.8-million mobile subscribers between them - and would be able to compete for enterprise contracts.
Cell C's current shareholders would effectively be paid back as Telkom's share price rose. Importantly, said the sources, Telkom would be able to reduce Cell C's hefty interest bill. In the six months to end-June, Cell C's net finance costs were R1.6bn, dragging it to a pre-tax loss of R645m.
Stripping out interest costs, taxes, depreciation and amortisation, Cell C generated earnings of R2.4bn in the interim period.
Blue Label management said previously that the company expects Cell C to become profitable by the end of next year. From that time, it plans to either list the operator or bring in a strategic investor.
Lester Davids, a trading desk analyst at Unum Capital, said the merits of the potential deal depend on valuations and the terms of the merger. "However, a potential tie-up could marginally reduce the capital expenditure required to expand its own network, as Cell C's infrastructure may be integrated."
Telkom and Blue Label declined to comment...