The Group holds the following investments in and loans to associates and joint ventures:

Loans to associates and joint ventures

The loans as at 31 May 2019 are neither past due nor impaired with a low risk of default. The carrying amount of the loans approximates their fair value.

The loans to associates and joint ventures are repayable on demand.

The Group’s interests in its other associates and joint ventures, which are unlisted, are as follows:

Impairment of associates and joint ventures

The following investments in associates and joint ventures were tested for impairment in line with IAS 36 due to there being impairment indicators:

• Cell C Limited
• Oxigen Services India
• Oxigen Online
• 2DFine Holdings Mauritius
• SupaPesa SA Proprietary Limited (SupaPesa SA)
• SupaPesa Africa Limited (SupaPesa Africa)
• Blue Label Mexico S.A de C.V. (Blue Label Mexico)

The result was that all of the above, excluding Blue Label Mexico, required an impairment charge to be recognised in the income statement. These impairments are included in impairments of associates and joint ventures.

This impairment was tested by comparing the recoverable amount against the carrying value of the investment in associates and joint ventures.

The recoverable amount is the higher of fair value less cost of disposal and the value-in-use. These value-in-use calculations use cash flow projections based on financial budgets approved by the Board of Directors for the forthcoming year and forecasts for up to five years which are based on assumptions of the business, industry and economic growth. Cash flows beyond this period are extrapolated using terminal growth rates, which do not exceed the expected long-term economic growth rate.

The key assumptions used for the value-in-use calculations of Cell C Limited, SupaPesa and Blue Label Mexico are as follows:

The discount rates used are pre-tax and reflect specific risks relating to the relevant associates and joint ventures. The growth rate is used to extrapolate cash flows beyond the budget period. The growth rates were consistent with publicly available information relating to long-term average growth rates for each of the markets in which the companies operate. The discount rates used for the prior year were adjusted to reflect the Group's target debt to equity ratio. This did not give rise to any impairments in the prior period.

A partial impairment of R30 million was recognised against the investment in SupaPesa in the current financial year due to a decline in revenue, primarily attributable to legislative changes and loss in clientele.

For Blue Label Mexico S.A. de C.V., if one or more of the inputs were changed to a reasonable possible alternative, there would be no impairment that would have to be recognised.

The Group has concluded that no impairment of its investment in Blue Label Mexico is required, in spite of it incurring losses in the current year. In order to mitigate such losses incurred, various initiatives where implemented in the last quarter which resulted in positive improvements to its financial performance. These initiatives included a reduction in staff complement, increases in cash collection and daily rental fees, the closure of unprofitable retail stores, the outsourcing of certain sales functions on a variable cost basis, the enhancement of its technology platform and the increase in the distribution of starter packs generating monthly compounded annuity income. Bill payments, credit and debit card acquiring and food vouchers are increasing on a monthly basis.

These initiatives will perpetuate in the year ahead, resulting in an expected turnaround to sustainable profitability.

Significant impairment of associates

Impairment of Cell C

On 2 August 2017, Blue Label, through its wholly owned subsidiary, The Prepaid Company, acquired 45% of the issued share capital of Cell C for a purchase consideration of R5.5 billion.

For the year ended 31 May 2019, management appointed an independent third-party valuation specialist to determine the value-in-use based on cash flow projections incorporated in the five-year Cell C business plan. They applied assumptions relating to the business, the industry and economic growth. Cash flows beyond this point were then extrapolated, applying terminal growth rates that did not exceed the expected long-term economic growth rate.

In determining the revised valuation, cognisance was taken into account of positive cash flow generation from:

The impact of the transactions in progress relating to a national roaming agreement and the recapitalisation of Cell C were not in effect as at 31 May 2019 and as such have not been accounted for in the valuation at that date.

Cell C concluded the national roaming agreement on 7 August 2019. This agreement is anticipated to positively impact the cost base and future cash flows on the successful implementation of this transaction. Furthermore, the debt within Cell C will require a capital restructure. These ongoing matters cast significant doubt over Cell C’s ability to continue as a going concern should they not materialise.

For purposes of the Group’s annual financial statements, Cell C has been accounted for using the going concern assumption. The Group’s share of Cell C’s losses has been recognised in “equity losses through the share of (losses)/gains from associates and joint ventures” in the Group income statement. An impairment assessment was performed on the Group’s investment in Cell C which resulted in an impairment being recognised. This is included in the “impairments on associates and joint venture” in the Group income statement. The result of this impairment is that the investment in Cell C is now carried at a nil valuation as at 31 May 2019.

The Group's remaining exposure to Cell C is as follows:

Financial guarantee in respect of Cell C’s facility

On 2 August 2018, Cell C procured R1.4 billion of funding from a consortium of financial institutions for a tenure of 12 months, secured by airtime to the value of R1.75 billion. In the event of default, TPC is required to purchase such inventory from the consortium on a piecemeal basis over a specified period that has been agreed upon. These purchases would be made in lieu of purchases that would have been made from Cell C within that period.

As at 31 May 2019, the above funding declined from R1.4 billion to R1.25 billion as a result of BLT purchasing from the security airtime. At this stage, the financial institutions have agreed to extend the repayment date to 30 November 2019. If Cell C is unable to meet this commitment by that date, and no further extension is granted, BLT will be required to purchase R100 millions of security airtime in November 2019 and R300 million per month in December 2019, January 2020 and February 2020 respectively.

It is the intention of TPC to accelerate payments to the banking consortium in order to distribute the vault stock in full by January 2020 if there is risk/indication that Cell C will not be able to meet its obligations to the banking consortium by 30 November 2019.

The fair value of the financial guarantee issued in respect of Cell C’s facility was valued to be insignificant taking into account the inventory held as collateral.

Management has performed detailed assessments considering seasonality of trading and has determined that, based on current inventory holdings and anticipated sales cycles, should circumstances dictate the need to purchase the abovementioned inventory from the consortium, acceleration of such payments could well result in the debt being expunged by mid-January through its trading capabilities in the ordinary course of business at normal operating margins.

Critical accounting judgements and assumptions

Financial guarantee

As explained above under the heading “financial guarantee in respect of Cell C’s facilty”, Cell C procured R1.4 billion of funding and utilised a portion of this funding to repay the R1.029 billion loan. Since the Group was a party to this new funding agreement, the Group considered whether it met the derecognition requirements of IFRS 9 for the loan receivable from Cell C. Specifically, the Group considered whether the loan receivable was extinguished and replaced with a new financial instrument, or whether this represented the continuation of the Group’s loan receivable from Cell C. The Group applied its judgement, and concluded that the R1.4 billion of funding represented a new financial instrument and therefore derecognised the loan receivable from Cell C. The qualitative factors that the Group considered in making this judgement included the fact that the original term of the loan receivable had come to an end and the new funding was for a different period of time compared to the initial term, an increase in the amount of the borrowing, a change in the interest rate from variable to fixed and changes to the repayment schedule from a bullet repayment schedule to an amortising repayment schedule.

Management is of the view that the purchasing of such inventory will not result in an onerous contract as this inventory is capable of being realised in the ordinary course of business without any negative impact being incurred by TPC.

Impairment of Oxigen Services India and Oxigen Online

Oxigen Services India and Oxigen Online are tested for impairment by comparing the recoverable amount against the carrying value of these investments. The recoverable amount is the higher of fair value less cost of disposal and the value-in-use. For Oxigen Services India and Oxigen Online the fair value less cost of disposal is higher than the value in use given the uncertainties around the future cash flow projections due to lack of funding. In order to calculate the fair values the finance department of the Group includes a team that outsources the valuations to qualified independent third-party valuation specialists required for financial reporting purposes, including level 3 fair values. This team reports directly to the Financial Director (FD) and the Audit, Risk and Compliance Committee (ARCC).

For Oxigen Services India and Oxigen Online, the fair value less cost of disposal is calculated by utilising relevant information generated by similar market transactions that have been concluded by comparable businesses. The fair value is based on a multiple applied to gross revenue, based on the same principles adopted by similar business to that of the Oxigen Services group, that was recently disposed of. This market approach provides the Group with more reliable evidence to support the valuation. The revenue multiple of 3.6 (2018: 4.3) was applied in determining the fair value. The assumptions and inputs used in calculating the fair value less cost to sell are regarded as level 3 fair value estimates.

The fair value of the 2DFine Group is based on its share of the fair value of Oxigen Services India and Oxigen Online less the liabilities of the 2DFine Group.

The corporate transaction, referred to in the 30 November 2018 interim results, did not materialise, and the resultant lack of funding necessitated BLT to impair its full investment of R118 million in the Oxigen Group. The full value of loans to Oxigen Services India of R30 million and 2DFine Holdings Mauritius of R101 million, net of a surety asset raised, were impaired. In addition, the Group has accounted for a R103 million liability relating to financial guarantee contracts.

Although alternative negotiations are in progress with other potential investors, until such time as a transaction is completed, the lack of cash resources will inhibit its propensity for growth.

The recoverable amount was calculated to be Rnil. The following were the key inputs in determining the recoverable amount:

• Uncertainty of future funding
• Adverse trading conditions
• Discontinuation of certain revenue streams.

Shares in associates converted to subsidiary in the current year

On 31 July 2018, the Group acquired the remaining 60% in WiConnect Proprietary Limited (previously called Lornanox Proprietary Limited) for R5 million.

Shares in associates and joint ventures acquired during the prior year

On 2 August 2017, Blue Label, through its wholly owned subsidiary, TPC, acquired 45% of the issued share capital of Cell C for a purchase consideration of R5.5 billion. Of this amount, 183 333 333 ordinary shares were subscribed for by third parties at an issue price of R15.00 per share, equating to R2.75 billion. The proceeds from this share issue together with existing cash resources was used to pay the purchase consideration of R5.5 billion.

On the same date, TPC concluded an agreement to purchase 100% of the issued share capital in 3G Mobile from its shareholders for a purchase consideration of R1.9 billion. The acquisition has been structured in two stages, whereby 47.37% of the issued share capital was initially acquired for a purchase consideration of R895 million. This has been accounted for as an associate from this date until 6 December 2017. Subsequently, the remaining 52.63% of the issued share capital was acquired for a further R963 million. From 6 December 2017, this investment is accounted for as a subsidiary. Refer to note 2.4 for further details.

Of the initial purchase of 47.37%, 16 666 666 ordinary shares were issued to the vendors at R16.97 per share, equating to R283 million. The balance of R612 million plus accrued interest was paid at the end of February 2018.

iCrypto Inc. was purchased on 31 March 2018 for R11.7 million. Significant influence is demonstrated by the Company as a result of representation on the Board of Directors. The Group has the option to acquire a further 10.71% for USD1 million. This option expires on 28 February 2020. This option has been accounted for as a financial asset at fair value through profit and loss in the statement of financial position, with movements in the fair value being accounted for in the statement of comprehensive income. Management has assessed that there were no significant movements between the option fair value as at the acquisition date and 31 May 2019.

Shares in associates converted to subsidiary in the prior year

BLT’s co-shareholder in BLM, Grupo Bimbo S.A.B de C.V. (Bimbo) has guaranteed the performance of BLM’s obligation to Radiomovil Dipsa S.A. de C.V. (trading as Telcel) (Telcel). BLT has in turn provided Bimbo with a back-to-back guarantee in terms of which BLT shall reimburse Bimbo a percentage (prorate to the respective parties’ shareholding in BLM) of any liability incurred by BLM in terms of its trade agreement with Telcel. At year-end there is no amount due to Telcel by BLM.

There are no other contingent liabilities relating to the Group’s interest in joint ventures.

For details on related-party transactions, refer to note 8.