How Cell C was bought with its own airtime
Scattered throughout the thousands of pages of documents about a landmark R13.5-billion recapitalisation of struggling cellphone company Cell C is a phrase that stands out amid the jargon of high finance: “the return of airtime agreement”.
So unusual is the phrase that, as of mid-August, a Google search would give you only four mentions, and each of those instances is in the Cell C deal documents made public in recent weeks. Although cellphone companies around the world every day accept vast sums of money in return for airtime, they are not typically in the business of exchanging unused airtime for cash at a later stage.
Cell C, it seems, is the exception. This July South Africa’s third cellphone provider bought R2.5-billion worth of its own airtime from the occasionally controversial JSE-listed company Blue Label Telecoms — which immediately used the money to fund a large part of its acquisition of a big stake in Cell C.
That probably makes Cell C the first company ever to be bought, in part, with its own airtime. It also raises questions about the transaction, so much so that Cell C’s own black empowerment shareholders, CellSaf, believe the vast and complicated deal, which has been portrayed as a way to save Cell C from ruinous debt, may, in fact, have amounted to a corporate magic trick.
Closely examining the at least 54 different contracts that comprised the Cell C acquisition reveals “clandestine legal and financial agreements”, empowerment consortium CellSaf says in a complaint it lodged with the Competition Commission, seen by the Mail & Guardian. These agreements serve to camouflage the truth, CellSaf alleges: that Blue Label and its partner Net1, of social grant payment infamy, have actually controlled Cell C for some time without regulators being any the wiser.
Profit – for some
Both Cell C and Blue Label were launched in 2001 and, at first, they had little else in common.
Cell C was created in a storm of publicity — and litigation — to break the duopoly of MTN and Vodacom in the cellphone market. Though those competitors all but seemed to be printing money, and rapidly expanded, Cell C did little but struggle. By this year its accumulated debts had reached about R19.5-billion, with no real prospect of ever paying them back.
Blue Label was created, almost unnoticed at first, by brothers Mark and Brett Levy, traders in electronic goods who named their company for the whisky by Johnnie Walker, a bottle of which came to symbolise each of the company’s big deals. Blue Label went from selling prepaid time on Telkom’s fixed-line phone network to selling prepaid airtime across all the local networks (as well as tickets, prepaid electricity and other products that can be reduced to a voucher number), and rode the growth in prepaid to success. Its last set of annual financials, released on Thursday, showed a net profit of R821-million.
Whereas Cell C found it hard to turn a profit running a cellphone network, Blue Label thrived in reselling airtime at a margin of about 7%. By 2015, one set of documents suggest, 90% of all Cell C prepaid airtime sold was being sold by Blue Label. Though one was turning a profit on those sales and the other a loss, their fortunes were deeply intertwined.
And by 2015 it was clear, to insiders at least, that Cell C was in very deep trouble.
At its launch Cell C was 40% owned by empowerment partners CellSaf, now at loggerheads with the company, and 60% by Saudi Oger, a Saudi-based corporate vehicle of Lebanon’s Hariri political dynasty. Between Oger’s lucrative construction contracts in Saudi Arabia and the personal wealth of the Hariris, it seemed as if Cell C’s coffers would be impossible to deplete.
“You’d be stupid if you’re not at least a little bit worried about competing against the money from basically all the oil in the world,” a top Vodacom executive conceded in 2001, describing Cell C’s ultimate backers as “basically every American that puts petrol in his car”.
Some blame a troubled oil market, with knock-on effects for those who do business with Saudi Arabia. Other say that Saad al-Hariri, the current prime minister of Lebanon, was never in the same business league as his father Rafiq, who was assassinated in 2005. Whatever the cause, by the end of 2015 Oger was missing salary payments in Saudi Arabia, and it was clear that Cell C would no longer have a sugar daddy.
[Sugar daddy: A memorial for Lebanese Prime Minister Rafiq al-Hariri. Initially, Cell C was 60% owned by Saudi Oger, part of Lebanon’s Hariri dynasty. Cell C lost its backer in 2015. (Photo: Patrick Baz/Getty Images)]
With blood in the water, Telkom formally confirmed in November 2015 it was looking into buying Cell C. By that stage, however, Blue Label was already well down the road in what it termed a quest to “recapitalise” Cell C.
What followed was a ludicrously complicated set of proposals and deals that ultimately came to involve a dozen corporate entities, several of which had their own back-to-back deals with outside investors.
One such deal, it emerged in March 2017, was with Net1, the company that shot to prominence this year for the contested role of its wholly owned subsidiary Cash Paymaster Services in distributing social grants.
Blue Label and Net1 have a great deal in common. Both companies have access to a lot of cash; like Blue Label, Net1 is turning an annual profit of about R1-billion a year, according to its latest quarterly results. Both companies do much of their business with the poorer segment of South Africa, Net1 with what it describes as the “unbanked and underbanked”, Blue Label with “people who do not have easy access to bank accounts”.
Both companies have also had various brushes with controversy, Net1 most recently in the social grant crisis caused by Social Development Minister Bathabile Dlamini and Blue Label by its association with allegations of state capture against Mark Pamensky, the former Eskom board member and director at Gupta-owned Oakbay Resources and Energy. Now Blue Label and Net1 also have their control of Cell C in common.
By way of a subsidiary Blue Label “now owns 45% of the issued share capital of Cell C”, it told its shareholders in an announcement on August 7, drawing a line under a year and a half of fraught negotiations.
“Net1 has acquired a 15% direct interest in the issued share capital of Cell C,” that company told its own shareholders in a simultaneous announcement.
But both companies left out of their announcements details of the transaction that may yet come to be crucial in legal and regulatory challenges to determine Cell C’s future.
Money from airtime
Just why Blue Label had R2.5-billion in Cell C airtime to return is not disclosed; the “return of airtime agreement” is not a public document and neither Blue Label nor Cell C responded to questions about it.
But in its submission to the Competition Commission, CellSaf suggests that Blue Label bought the airtime for ulterior motives. Among papers it saw, CellSaf says, was a guarantee by Blue Label to buy a minimum of R436-million worth of airtime, cash on delivery, from Cell C every month.
“It is our view that the purchase of airtime by [Blue Label] from Cell C was designed to keep Cell C afloat,” says CellSaf of the transaction.
That interpretation could be of interest to a range of regulators and oversight bodies, and could spell trouble if any find that Blue Label used airtime to disguise an interest-free loan as a purchase.
Blue Label responded to questions by saying it “has made full and proper disclosures to its shareholders in terms of our continuous obligations of the listings requirements” as a JSE-listed company. It referred other questions to Cell C, which did not answer them.
Net1’s other 15%
On August 7, in announcing its 15% Cell C stake, Net1 also disclosed that it had paid R1.3-billion to buy 45% of an obscure company named DNI-4PL, with an option to increase its stake to 55%.
DNI “is the largest wholesaler of Cell C starter packs in South Africa”, Net1 told its shareholders.
But CellSaf says DNI is potentially much more than that.
As part of its recapitalisation the ownership structure of Cell C was radically reorganised, with debts and shares dumped into three new special-purpose vehicle companies named Cedar, Magnolia and Yellowwood. Between them those three companies now own a combined 30% of Cell C.
In its inspection of confidential documents, the empowerment partner told the Competition Commission, it discovered references to options between DNI and two of the three companies. These would, essentially, allow DNI to take over those two companies. The effect “is that DNI could end up holding up to 27.8%” of Cell C, CellSaf says.
If Net1 in turn owns 55% of DNI, that gives it another indirect — and undisclosed — 15.3% of Cell C, on top of its direct 15% purchase.
Between them, then, Blue Label and Net1 can end up owning 75.3% of Cell C — just over the 75% level required in law to pass special board resolutions.
That level of ownership also makes it impossible for anyone else to own the 25% of the company that would allow such shareholders to have their representative directors call a board meeting, or to invoke other minority protections.
But Net1’s board this week flatly denied the existence of such an arrangement, saying it was “not aware of” the options CellSaf alleges.
Oger goes bang
At the end of July several news outlets in the Middle East reported that Saudi Oger had shut up shop, told employees they were out of jobs and had the electricity to its offices cut off. This made it clear why Cell C’s original controlling shareholder had negotiated an exit from the cellphone company. Saudi Oger did not receive a cent for its shares, but it walked away from Cell C’s debts.
Why Blue Label and Net1 would pour money into Cell C is somewhat less clear. The companies have told their shareholders that Cell C represents an opportunity for growth and diversification, while also giving them a more direct way to reach consumers.
CellSaf believes this has sinister implications.
“It would appear that the recapitalisation programme would enable Net1 to market their services via mobile phones, perhaps to grant recipients,” CellSaf told the Competition Commission, and urged it to investigate that aspect.
Net1 this week said all cellphone companies sell to all South Africans, including grant recipients, implying there is nothing sinister in that.
As for Blue Label, CellSaf has pointed to Cell C’s peculiar attitude to retailers as an example of why it might want a tighter grip on the cellular provider — and claims it already had such a grip even before formally buying into it.
In February, Cell C pulled out of a distribution deal with Massmart, which meant that Cell C products were not available at chains such as Game and Dion Wired.
Customers of those stores were instead directed to the Edgars chain. Edgars sells cellphone products using a subsidiary called Edgars Connect, which, despite the name, is 51% owned by Blue Label.
In response to questions put to Blue Label, Cell C expressed its disappointment at what it described as two years of attempts by CellSaf to derail a set of deals that “will ensure a sustainable business for all concerned”.
“Cell C will co-operate with the Competition Commission, should they wish to engage with us in this matter, and we have already written to them as a courtesy,” it said.
Deal drives wedge between Cell C, empowerment partner
JSE-listed companies Blue Label Telecoms and Net1 are involved in “a blatant attempt at [the] corporate capture” of Cell C, the cellphone company’s black empowerment partner CellSaf said on Wednesday — but vowed they would not get away with it.
“CellSaf is confident that this blatant attempt to hijack Cell C will be shunned by South Africa’s courts and regulators,” it said in its statement, without detailing what action it would take. But the Mail & Guardian has seen an extensive and detailed complaint made to the Competition Commission last month.
Cell C said in its turn that CellSaf has long tried, and failed, to derail a vital transaction and it does not have a legal leg to stand on.
The exchange of unpleasantries came as Cell C’s new owners said they had completed a complex series of deals that have the effect of reducing CellSaf’s shareholding in Cell C to 7.5%.
CellSaf originally owned 40% of Cell C, a fact that was celebrated as a victory for empowerment when Cell C launched in 2001. That shareholding was dubbed “non-dilutable” under the company’s licence. In 2005 CellSaf sold its shares down to 25% of Cell C to clear itself of debt. That too was celebrated, and the 25% stake was again classified as nondilutable. Whether or not it has been diluted again may be the subject of legal action.
“CellSaf does not accept the dilution from 25% to 7.5%, which it considers illegal,” representative Zwelakhe Mankazana said this week, in response to M&G questions.
But in a response to questions given prior to CellSaf’s statement, Cell C painted CellSaf’s claims as a spoiler’s attempt to endanger a life-or-death set of deals.
“It is vitally important to realise that the recapitalisation of Cell C was necessary to ensure Cell C’s survival,” the company said, listing instances when it had defaulted on debt payments.
Despite its objections, “at no stage have CellSaf presented a viable alternative” to keeping Cell C afloat, it said.
Cell C insisted that all regulatory hurdles had been met.
Earlier in August, Communications Minister Ayanda Dlodlo welcomed the recapitalisation of Cell C, saying it had increased “participation of historically disadvantaged persons in Cell C”.