On 2 August 2017, Blue Label, through its wholly owned subsidiary, The Prepaid Company, acquired 45% of the issued share capital of Cell C Limited (Cell C) for a purchase consideration of R5.5 billion.
As at 31 May 2019, the Group's investment in Cell C was impaired to nil. It remains at nil as at 31 May 2021.
Critical accounting judgements and assumptions
Going concern of Cell C
For purposes of the Group's annual financial statements for the year ended 31 May 2021, Cell C has been accounted for using the going concern assumption. Based on the following facts available, management is of the opinion that Cell C will continue as a going concern for the foreseeable future:
- Cell C concluded the national roaming agreement on 7 August 2019, 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.
- 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. Although the liquidity position of Cell C remains challenging, Cell C has proven that it has managed to continue trading despite the liquidity concerns and management is confident that this committee will 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, as well as designing the revised business plans that support the new operating business model.
- Management remains optimistic that the planned recapitalisation of Cell C will be successful. The recapitalisation is important to improve the capital structure of the Company and the deferral of repayments that will support the long-term sustainability of Cell C. Stakeholders have appointed independent advisers to assist with the recapitalisation and/or debt restructuring process and formal engagements are ongoing.
- 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, the Group, through its subsidiary Comm Equipment Company (CEC), entered into an arrangement with Cell C to facilitate Cell C's operation of the base. The agreement commenced on 1 November 2020 for an initial period of five years, with CEC having the right to renew for a further four years. 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 capital on its USD184 002 000 note which was due on 2 August 2020, as well as interest and capital repayments related to the respective bilateral loan facilities between Cell C and Nedbank Limited, China Development Bank Corporation, Development Bank of Southern Africa Limited and Industrial and Commercial Bank of China Limited, which were due in January and July 2020.
Currently, none of the bilateral loan facilities have been accelerated as noteholders are aware and support that Cell C is committed to resolving the situation by agreeing to restructuring terms with its lenders while it continues to work proactively with all stakeholders to improve its liquidity, debt profile and long-term competitiveness.
Management and the directors have taken the default into consideration as part of their overall assessment of the going concern principle for Cell C, and are of the view that the going concern assumption is still applicable. The default does 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.
Although no certainty exists around the successful implementation of the recapitalisation, management remains optimistic. Refer to the discontinued operations note detailing the fair value of the contingent consideration receivable for the probability applied by management in determining Cell C's liquidity and solvency.
Classification of Cell C Limited as an associate
Blue Label Telecoms acting through its wholly owned subsidiary, The Prepaid Company Proprietary Limited (TPC), acquired a 45% interest in Cell C Limited. The Group will be entitled to appoint four of the 11 directors to the Cell C Board which will represent 36% of the overall votes of the Board. Based on the Group's shareholding and representation on the Board, management has assessed Cell C Limited to be an associate, as the Group will have the power to participate in (but not control) the financial and operating policy decisions of Cell C Limited.
The arrangement between Cell C and CEC as described in note 4.2 of the annual financial statements has not altered the decision making power of the Group over Cell C. Therefore the Group continues to account for Cell C as an associate.
Impairment of Cell C
TPC's equity share of the value of Cell C as at 31 May 2021 remained at nil value. The key assumptions applied in determining the value-in-use calculations are as follows:
| May 2021 | May 2020 | |||||||
| Average EBITDA margin % |
Terminal growth rate% |
Discount rate % |
Average EBITDA margin % |
Terminal growth rate % |
Discount rate % |
|||
| Cell C Limited | 19.9 | 4.0 | 18.8 | 22.6 | 4.0 | 19.6 | ||
|---|---|---|---|---|---|---|---|---|
An independent third-party valuation specialist was appointed to determine the value of Cell C based on cash flow projections incorporated in the five-year Cell C business plan. Assumptions relating to the business, the industry and economic growth were applied. Cash flows beyond this point were then extrapolated, applying terminal growth rates that did not exceed the expected long-term economic growth rate for the markets in which Cell C operates. The discount rates used are pre-tax and reflect specific risks related to Cell C. The valuation does not take into ac count the effects of any planned future restructuring or recapitalisation.
TPC's equity share of the value as at 31 May 2021 remained Rnil, however, there was an overall positive impact on value compared to the prior year, attributable to the following:
(a) A decrease in interest-bearing borrowings due to favourable exchange rate fluctuations.
(b) A slight decrease in the WACC.
(c) A slightly quicker utilisation of the assessed tax loss.
The above positives to value were offset to some extent by a decrease in the EBITDA margin and increases in both net working capital requirements and capital expenditure, which had the effect of reducing the forecast cash flows.
Summarised financial information
Principal activity: Mobile network
Country of incorporation: South Africa
Financial year-end: 31 December*
| 31 May 2021 R'000 |
31 May 2020 R'000 |
|||
| Statement of financial position | ||||
| Non-current assets | 13 565 997 | 10 674 432 | ||
| Current assets | 6 228 984 | 4 966 723 | ||
| 19 794 981 | 15 641 155 | |||
| Total equity | (5 559 338) | (8 012 705) | ||
| Non-current liabilities | 5 800 315 | 4 844 963 | ||
| Current liabilities | 19 554 004 | 18 808 897 | ||
| 19 794 981 | 15 641 155 | |||
| Effective percentage held (%) | 45 | 45 | ||
| Net assets | (5 559 338) | (8 012 705) | ||
| Company net assets | (12 859 268) | (15 312 635) | ||
| Carrying value of purchase price allocations net of deferred taxation | 7 299 930 | 7 299 930 | ||
| Interest in associate | (2 501 702) | (3 605 717) | ||
| Goodwill | 1 317 776 | 1 317 776 | ||
| Accumulated impairment | (2 521 152) | (2 521 152) | ||
| Accumulated losses not guaranteed | 3 705 078 | 4 809 093 | ||
| Balance at the end of the year | – | – |
| * | Where the financial year differs from the Group's year-end of 31 May, special purpose accounts are prepared to coincide with the Group's reporting period. These special purpose accounts are adjusted for the Group's equity-accounted adjustments. |
Statement of comprehensive income for the year ended*
| 1 June 2020 to 31 May 2021 |
1 June 2019 to 31 May 2020 |
|||
| Revenue | 13 954 861 | 14 593 152 | ||
|---|---|---|---|---|
| Net profit/(loss) before taxation | 2 363 748 | (10 686 875) | ||
| Taxation | 89 619 | – | ||
| Net profit/(loss) after taxation | 2 453 367 | (10 686 875) | ||
| Other comprehensive income | – | – | ||
| Not guaranteed | (2 453 367) | 10 686 875 | ||
| Total comprehensive income | – | – | ||
| Effective percentage held | 45 | 45 | ||
| Share of total comprehensive income | – | – |
| * | Where the financial year differs from the Group's year-end of 31 May, special purpose accounts are prepared to coincide with the Group's reporting period. These special purpose accounts are adjusted for the Group's equity-accounted adjustments. |
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 would be required to purchase such inventory from the consortium on a piecemeal basis over a specified period that was agreed upon. These purchases would be made in lieu of purchases that would have been made from Cell C within that period.
An extension was concluded on 31 May 2020 with an agreed quantum of airtime purchases required to be made by The Prepaid Company on a monthly basis. This would have resulted in the Cell C facility reducing to nil by 31 March 2021. However, as at 31 May 2021, the above funding had declined to R182 million (May 2020: R959 million) as a result of The Prepaid Company purchasing from the security airtime. This outstanding balance will be paid by way of The Prepaid Company purchasing approximately R35 million per month from the security airtime, commencing June 2021.
It is the intention of TPC to accelerate payments to the banking consortium in order to distribute the vault stock in full if there is risk/indication that Cell C will not be able to meet its obligations to the banking consortium. 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 above mentioned inventory from the consortium, acceleration of such payments could well result in the debt being expunged within one and a half months through its trading capabilities in the ordinary course of business at normal operating margins.