Cell C’s largest shareholder, the JSE-listed Blue Label Telecoms, said on Friday that The Buffet Consortium plans to buy a minority shareholding in Cell C that will bolster the mobile operator’s balance sheet.

The Buffet Consortium is backed by reclusive South African billionaire property mogul and businessman Jonathan Beare.

Blue Label said Cell C has concluded a “binding term sheet” with the consortium in terms of which it will become a minority shareholder, pending certain conditions being fulfilled.

“With Buffet support, the Cell C balance sheet will be bolstered and ensure Cell C’s sustainable growth for the future,” Blue Label said in a statement to shareholders.

“A further detailed announcement will be made once the parties have executed the transaction documents required to give effect to the principles recorded in the binding term sheet.”

It’s not yet clear if the latest developments have put paid to Telkom’s aspirations to buy into Cell C. Speculation surfaced in recent months that Telkom was interested in buying Cell C, possibly in some sort of share-swap arrangement involving Blue Label.

The planned Buffet investment comes on the same day that Cell C announced that its CEO, Jose Dos Santos, will step down. Dos Santos will continue to consult to Cell C chairman Kuben Pillay.

Earnings fall

In a separate statement to shareholders, Blue Label said on Friday that headline earnings per share for the six months ended 30 November 2018 are expected to fall sharply compared to the same period in 2017. It could report a Heps loss of as much as 18.78c, compared to positive Heps of 166.68c a year ago.

“Although the core businesses of the Blue Label group generated positive growth, the once-off underlying financial adjustments relating to Cell C had a negative impact thereon,” it said.

“The financial results for the comparative six-month period ended 30 November 2017 included the recognition of a deferred tax asset by Cell C, of which the group’s share equated to R864-million. This was a once-off recognition to earnings in the comparative period.”

In addition, as part of the restructure of Cell C’s debt to third-party lenders, Blue Label subsidiary The Prepaid Company was obligated to purchase bond notes issued by a special purpose vehicle (SPV1) with a capital redemption value of US$21-million at a coupon rate of 8.625% per annum for a purchase consideration of $9-million and to provide liquidity support to a second special purpose vehicle (SPV2) of up to $80-million in the form of subordinated funding.

Oger Telecom, Cell C’s former controlling shareholder, contributed $36-million of the $80-million, thus confining The Prepaid Company’s obligation in this regard to a maximum of $44-million.

“SPV1 and SPV2 own 11.8% and 16% of the shares issued by Cell C respectively. No other assets are held by these entities, and as such the group’s bond note and liquidity support arrangements will be settled only once the value of Cell C’s shares are realised by both SPV1 and SPV2,” Blue Label said. “Blue Label has a revisionary pledge amounting to 5% of the shares issued by Cell C relating to the group’s exposure in SPV2.

“The derivatives were initially required to be recognised at fair value and thereafter to be measured at fair value through profit or loss. Although the valuation of Cell C as at 30 November 2018 of R13.4-billion was adequate to support the carrying value of the investment therein, it was not adequate enough to support the recoverability of The Prepaid Company’s exposure to SPV1 and SPV2. As a result, a fair value downward adjustment totalling R493-million, of which R47-million related to SPV1 and R446-million to SPV2, impacted negatively on core headline earnings. The remaining values of these derivatives are R121-million for SPV1 and R102-million to SPV2.”

Meanwhile, an increase in the number of Blue Label shares in issue will also weigh on earnings per share. The weighted average number of shares in issue rose from 806 million in November 2017 to 926 million in November 2018. Blue Label issued additional shares to fund part payment for the acquisition of Cell C and another company, 3G Mobile.

Core healthy

“On exclusion of the financial results of Cell C and the negative impact of the SPV adjustments, the group expects core headline earnings from the balance of the entities within the Blue Label group to be between R500-million and R521-million, compared to R431-million in the prior period,” it said.

“After taking into account the increase in the weighted average number of shares in issue, core headline earnings per share from the balance of the entities within the Blue Label group are expected to be between 54.01c and 56.28c for the six months ended 30 November 2018, compared to 53.45c in the prior period. This represents an increase of between 1% and 5.3% on the prior year.”