Market unconcerned about Cell C bond U-turn - TechCentral

Market unconcerned about Cell C bond U-turn

Cell C's head office in Johannesburg

Cell C’s head office in Johannesburg

Market watchers are not worried about the decision by mobile operator Cell C to ditch its R8,5bn planned bond placement to reduce its crippling debt load of R20,7bn.

Prepaid technology specialist Blue Label Telecoms, which is in the process of buying a 45% stake in Cell C, was informed by the company that it plans to reduce its debt without the bond placement.

Cell C’s management were on a roadshow in London during October to drum up support for its planned US$600m bond placement — R8,5bn in rand terms at the time — to recapitalise its balance sheet.

The planned bond placement was nearly 40% of Blue Label’s market capitalisation (R13,7bn at the time of writing).

In October, Blue Label announced that it will acquire a 45% stake in South Africa’s third largest mobile operator for R5,5bn instead of the initial 35% in December ­as part of the company’s recapitalisation. Upping its stake in Cell C has fuelled market speculation that it might make a bid for an even higher stake in future.

The conditions for the deal to be consummated included that Cell C must have debt of no more than R8bn. This requirement still sticks.

Blue Label recently revealed Cell C’s results, which show that the company’s net debt stood at R20,7bn compared with R14,3bn in 2014.

Payment solutions technology company Net1 UEPS Technologies also participated in the Blue Label-Cell C transaction by acquiring a stake of roughly 15% in the former.

Although it is unclear how Cell C plans to reduce its debt without the bond placement, it is understood that further details will be unveiled at Blue Label’s general meeting on 16 November.

Cell C hadn’t responded to a request for comment at the time of publication.

Allan Gray’s investment analyst Rory Kutisker-Jacobson says from a Blue Label shareholder perspective, the mobile operator’s announcement has “a minimal to zero impact on the Cell C deal [with Blue Label].”

“Raising debt doesn’t reduce debt in a business per se. What has changed is the anticipated mix of debt holders post the recapitalisation. Presumably, the intention of the bond placement was to use that debt to repay the existing debt holders — to transfer the debt from one counter party to another. This will no longer be the case,” says Kutisker-Jacobson. Allan Gray is a shareholder in Blue Label.

Mark Ansley, a portfolio manager at Argon Asset Management, doesn’t see a problem with Cell C achieving its debt reduction target without a bond placement. “We would assume that Blue Label will waive this condition, provided that Cell C achieve their target in a sensible and non-compromising way,” says Ansley.

Cell C’s recapitalisation programme (expected to be finalised in mid-November) will result in a shareholding structure change, with management and staff of Cell C expected to subscribe for 25% of the issued capital and 3C Telecommunications subscribing for new equity to hold the remaining 30% of the total issued share capital.

Prior to Cell C’s bond placement withdrawal, ratings agency Moody’s placed Cell C’s B3 rating under review and was looking to assign a B2 rating on its proposed notes to raise capital. A B3 rating is typically regarded as non-investment grade.

Any upgrade of its rating hinged on the successful implementation of its recapitalisation, which was expected to include a R16bn injection on its balance sheet from new and existing shareholders and a further R8,5bn from the bond placement, which was expected to reduce Cell C’s debt to R8,5bn.

  • This article was originally published on Moneyweb and is used here with permission

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