Cell C is tempting, but still no signal from Telkom
Cell C is getting cheaper and cheaper for a possible suitor as its rivals' woes feed through to its own valuation, but the phone's not ringing yet.
SA's third-largest and debt-laden mobile operator is not listed on a stock exchange and does not update the market regularly on its earnings, making it difficult to form an accurate picture of its financial state. But recent trading updates by market leaders Vodacom and MTN have shown how consumers are tightening their belts and, though data consumption is on the rise, the revenue it generates is hardly growing at all.
It has always been difficult for more than two mobile operators to make decent profits in a market, and Cell C has been struggling for years against its larger rivals.
Analysts believe the company needs scale to compete. The same goes for Telkom's mobile business.
The fixed-line operator was rebuffed by Cell C two years ago. Telkom has had a good run since then - its share price is up more than 40% in the past six months alone, giving it more punch for a share-based merger deal.
"An acquisition would be a good idea to acquire growth in the mobile business," Telkom CEO Sipho Maseko told Bloomberg on Friday. But he added that merely buying voice call revenues would not be his preference, as "data is the new voice".
Maseko declined to comment to Business Times on any possible deal with Cell C.
"It certainly looks a lot more attractive at the moment than when Telkom first had a look at Cell C," said FNB Wealth's head of equity research Chantal Marx.
But with Cell C it is difficult to tell.
Net1 UEPS, one of Cell C's minority shareholders, gave investors a clue, cutting the value at which it holds the $150m (R2.1bn) investment on its books by $15.8m last week. But Cell C's equity is more likely worth close to zero, said Investec Asset Management.
Net1 joined Blue Label Telecom three years ago in a bid to recapitalise Cell C, lowering Saudi Arabian Oger Telecom's majority stake to a minority in the process. The deal made Blue Label the largest shareholder, with 45%, and gave Net1 15%.
But Cell C has since weighed on its largest shareholder's stock. Blue Label's share price has plummeted more than 60% in the past year, not necessarily due to bad news from Cell C, but more likely from the lack of information and the uncertainty it creates among investors.
"If disclosure is not good, the market will make its own conclusions," said Marx.
Blue Label, which is in a closed period as it reports results at the end of the month, is SA's largest distributor of airtime and other prepaid services and the deal was part of its plan to grab a larger share of the profits.
"Blue Label probably thought they would generate more benefits from their vertical integration plans," said Marx.
A share swap could be one way for Telkom to approach a deal. It would leave Blue Label with a stake in Telkom and could keep some of the airtime distributor's hopes of grabbing a larger share of the value chain alive, said Marx.
Said Investec Asset Management portfolio manager Hannes van den Berg: "Although we agree that Telkom could potentially extract synergies from a Cell C deal, we think that Telkom is only now starting to gain traction with their own mobile business."
Telkom still has some runway and fixing it can do on its own mobile business, he added.
"We think that it does not make sense to use paper now to buy a business like Cell C that is a competitor under a lot of pressure."
If Telkom does buy Cell C, it will be for subscriber numbers, not for its infrastructure, said Marx.
Telkom's own infrastructure is geared very much towards higher data usage, which is the trend among SA's mobile consumers.
Telecommunications rivals and several other service providers have been digging up pavements for years to bury fibre-optic cables for high-speed internet use.
And the state's stake in Telkom could complicate plans for a share-based deal, according to Van den Berg.
The government and the Public Investment Corporation together hold more than 40% of Telkom's shares. But with state finances very tight due to shortfalls in tax revenue collection, it would likely not be able to follow any new issue of shares, which would mean that such a move would dilute its stake in Telkom.