Notes to the Company annual financial statements | Note 11

Derivative liability

On 15 December 2021, BLT concluded a put option agreement with Digital Ecosystems Proprietary Limited (DE), formerly Blue Label Mobile Proprietary Limited, in terms of which DE acquired the right to put up to 40% of the shares in Airvantage to BLT no earlier than 15 December 2022 for a maximum amount of R110 million. If Cell C Limited, through a Board resolution, passes a solvency and liquidity test prior to 15 December 2022, the put option will be terminated.

On 26 August 2022, in anticipation of the Cell C recapitalisation, the put obligation was terminated by DE.

Significant judgements when accounting for the derivative liability for the 2022 year-end

In valuing the put option, management had taken into account the adverse impact on Airvantage's operations should the solvency and liquidity of Cell C remain unproven, since the Airvantage business is largely dependent on Cell C. The derivative was therefore measured at the difference between the fair value of Airvantage and the exercise price of the put option. Accordingly, these inputs are level 3 inputs per the fair value hierarchy.

For the 2022 year-end Cell C was accounted for using the going concern assumption and based on the facts listed below management was of the opinion that Cell C would continue as a going concern for the foreseeable future:

• Cell C concluded the national roaming agreement which became effective on 4 May 2020. This agreement is one of the key pillars in Cell C's transformation plan, as well as its long-term network strategy to optimise operating costs and reduce capital outlay as part of the turnaround strategy. This agreement is anticipated to positively impact the cost base and future cash flows on the successful implementation of this transaction.
• The Board of Cell C established a liquidity committee to monitor the liquidity position of Cell C and to ensure that the business is not trading recklessly during the negotiations of the recapitalisation and debt restructure. Even though the liquidity position of Cell C remains challenging, Cell C managed to continue trading. Management was confident that this committee would manage the liquidity position of Cell C until the conclusion of the recapitalisation process.
• Cell C appointed independent financial restructuring advisers to assist in stringent monitoring of the liquidity of Cell C, and designing the revised business plans that support the new operating business model. Stakeholders appointed independent advisers to assist with the recapitalisation and/or debt restructuring process. Formal engagements were ongoing.
• A roaming agreement with Vodacom was concluded in November 2020 which is aligned to Cell C's revised network strategy, aimed at managing capacity in a more scalable and cost-efficient manner through a roaming model. Contract and broadband customers were transitioned in stages to roam on the Vodacom network. The strategic vision is to differentiate Cell C by focusing on innovative products and services without being owners of capital-intensive infrastructure. This creates more flexibility and capacity to deliver the right quality of service to current and future customers.
• Cell C embarked on a strategy to reconsider its current service offering, whereby Cell C identified the need to either wind down or restructure the service offering being provided to its postpaid mobile telecommunication business (the base). During the 2021 financial year Comm Equipment Company (CEC) entered into an arrangement with Cell C to facilitate Cell C's operation of the base which commenced on 1 November 2020 for an initial period of five years, with CEC having the right to renew for a further four years. In terms of the agreement CEC is entitled to receive a share of the subscription income generated by Cell C from a subset of postpaid subscribers that sign up, extend or upgrade their subscriptions with Cell C after 1 November 2020 (New and Upgrade subscribers) plus certain fixed and variable payments. Cell C will remain entitled to the subscription income of existing subscribers at 31 October 2020 for the remainder of the subscribers' contract and a share of the ongoing revenue of New and Upgrade subscribers. The aim of the reorganisation would be for the base to remain intact and grow in the future, and for Cell C to have limited downside risk on the base.

On 4 August 2020, Cell C notified its noteholders that it defaulted on the payment of certain notes but at the 2022 year-end none of the notes had been accelerated as noteholders were aware and supported that Cell C was committed to resolving the situation by agreeing to restructuring terms with its lenders while continuing to work proactively with all stakeholders to improve its liquidity, debt profile and long-term competitiveness.

Management and the directors had taken the default into consideration as part of their overall assessment of the going concern principle for Cell C and were of the view that the going concern assumption was still applicable. The default did not change any judgements or assumptions made in the financial assumptions that are dependent on the continued operation of Cell C as a going concern.

On 26 August 2021, The Prepaid Company Proprietary Limited (TPC) concluded a term sheet for an Airtime Purchase transaction with Investec Bank Limited, First Rand Bank Limited (acting through its Rand Merchant Bank division) and other financiers, the proceeds of which were intended to be utilised for the recapitalisation of Cell C. This arrangement is subject to the conclusion of all legal documentation and fulfilment of all conditions precedent under such legal documentation.

On 15 March 2022, BLT concluded a non-binding term sheet (Umbrella Restructure Term Sheet) with Cell C and various Cell C financial stakeholders (including certain shareholders and creditors of Cell C). In terms of the Umbrella Restructure Term Sheet, Cell C was restructured and refinanced (the Proposed Transaction) with the purpose of deleveraging its balance sheet, providing it with liquidity with which to operate and grow its businesses and to position itself to achieve long-term success for the benefit of its customers, employees, creditors, shareholders and its other stakeholders. The Umbrella Restructure Term Sheet is non-binding, save for stand-still provisions and certain provisions of a general nature which are binding.

For the year ended 2022 management attributed a 20% probability to the solvency and liquidity of Cell C being unproven and accordingly accounted for 20% of the put option value.

The change in fair value has been included in profit or loss for the period. Refer to note 15.