OGER’S 60% STAKE IN CELL-C MAY BE SOLD AS COMPANY RESTRUCTURES
Cell C is planning a thorough review of its capital and controlling structure. Shareholders are looking at a number of options, which include the sale by majority shareholder Saudi Oger of its 60% stake in the company. Other options include an equity recapitalisation and raising more funds from Saudi Oger.
Apart from the Saudi group, the shareholders are empowerment partner CellSAf (25%) and Saudi investment house Lanun Securities (15%). A sale looks likely: recent reports suggest that Saudi Oger no longer regards SA as a key market and would be willing to sell its stake in Cell C - and, in fact, may already be in talks to do so - so that it can concentrate on its telecom operations in Turkey, where it owns fixed-line and wireless networks. Saudi Oger also recently made a bid for Saudi Arabia's third cellphone licence but lost out to a higher bid from Kuwait's Mobile Telecommunications.
Cell C's American CEO, Jeffrey Hedberg, appointed last year with the brief of turning around the loss-making company, says there are a "number of parties" that have expressed interest in buying into the cellphone operator, which is SA's smallest with only 9% of SA cellphone subscribers on its books. "We are a unique asset in a very important market in Africa," says Hedberg. "We are turning the company around and are seeing encouraging results coming from the strategic and tactical things we are doing."
In results this week, Cell C reported a 19% jump in revenue to R6.5bn. But earnings before interest, tax, depreciation and amortisation (Ebitda) dropped, from R542m to R459m, on higher operational costs and losses incurred by Virgin Mobile SA, a 50-50 joint venture with Richard Branson's Virgin Group. Hedberg is determined to turn Cell C around and report the company's first taxed profit within the next 24 months. The company has also said it wants to double Ebitda by the end of next year.
A review of the company's capital structure should help. Hedberg wants to reduce the amount of money it spends servicing debt- almost US$100m in the 2006 financial year - much of it dollar- and euro-denominated and thus subject to the volatility of exchange rates.
Virgin Mobile's poor performance hasn't helped matters. The company failed to meet its "ambitious" initial targets. CEO Sajeed Sacranie was fired last year and Peter Boyd hired to replace him. "He is reconfiguring a lot of the pieces of the company," Hedberg says. "The new plan is far more realistic."
Hedberg says Virgin Mobile has improved its performance in the first quarter of 2007. "We've been pleased with the way Virgin Mobile has a new bounce in its step with Peter's appointment. It's a pleasant change to what happened in the last six months of 2006."
Other than the troubles at Virgin Mobile, Cell C's Ebitda took a hit from increased operational expenditure, especially in call centres and back-office systems. The salaries bill rose in order to offer market-related packages to key employees.
But the good news is that infrastructure spending should come down. Cell C has 2 150 base stations and Hedberg says the focus has shifted away from network deployment to network upgrades and improving back-office systems. The company is establishing more of its own retail outlets to improve profit margins at the point of sale.
Under Hedberg, the company has chosen not to focus on the upper end of the market, which he believes is already well catered for by MTN and Vodacom. Instead, he wants to grow Cell C's business in the LSM 3-7 income category and leave the upper-income LSM 8-10 market to Virgin Mobile.
Hedberg says Cell C made the mistake in the past of simply trying to emulate Vodacom and MTN by offering everything to everyone. "There was no clear strategy," he admits. "As the number three operator, with the balance sheet we have, we need to differentiate ourselves from the competition."
With this in mind, Cell C will be introducing several new products, the first of which it launched this week - a prepaid starter pack called Hola 7, which is branded by activist musician Zola. Cell C says the new products will give it better access to sales channels that are dominated by MTN and Vodacom.
Hedberg is confident that Cell C can be profitable relying on lower-income earners, even though their average monthly spend is significantly less than the top end of the market. "In the Philippines, Arpu [average revenue per user] is about R10/month, but they are still making 40%-50% margins," he says.
The focus on LSM 3-7 means that, for now, Cell C has abandoned plans to build a third-generation (3G) cellular network to compete with MTN and Vodacom in mobile broadband. In its target market, demand is for basic voice, text messaging and occasional Internet access, Hedberg says. Those who do need regular mobile Internet access are served by Cell C's Edge network (Edge is a faster version of GPRS but it is not as quick as 3G). "I think 3G is all about perception and not about financial return. It is not an economically sustainable model. Handsets are expensive and the pull from the market is limited," Hedberg says.