Cell C Limited

On 2 August 2017, Blue Label, through its wholly owned subsidiary, The Prepaid Company (TPC), 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 Rnil. It remains at Rnil as at 31 May 2022.

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 2022, Cell C has been accounted for using the going concern assumption. As the Group's share of Cell C's losses exceed the carrying amount of the investment (Rnil), the Group has ceased recognising its share of further losses. If Cell C subsequently generates profits, the Group will resume recognising its share of profits only after its share of the profits equals the share of losses not recognised.

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. 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. 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. Stakeholders have appointed independent advisers to assist with the recapitalisation and/or debt restructuring process and formal engagements are 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 have been 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 our 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, 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 8.625% First Priority Senior Secured Notes 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 also 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.

On 26 August 2021, TPC concluded a term sheet for an Airtime Purchase transaction with Investec Bank Limited, FirstRand Bank Limited (acting through its Rand Merchant Bank division) and other financiers, the proceeds of which are 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, Blue Label concluded a non-binding term sheet (Umbrella Restructure Term Sheet) with Cell C and various Cell C's financial stakeholders (including certain shareholders and creditors of Cell C). In terms of the Umbrella Restructure Term Sheet, Cell C will be 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.

The salient terms of the Proposed Transaction are set out below.

Capital and debt restructure:

In order to facilitate the restructuring of Cell C's debt owing to certain secured lenders totalling c.R7.3 billion, with such amount being fixed as at November 2019, TPC shall loan to Cell C an amount required to affect a compromise offer to be made by Cell C to certain of its secured lenders of a maximum amount of up to R1.46 billion (TPC Debt Funding). It is anticipated that TPC's actual funding obligation in respect of the compromise offer will, however, amount to R1.03 billion.

The TPC Debt Funding will be provided by TPC to Cell C in the form of a secured loan. Cell C will utilise the TPC Debt Funding to settle the claims of secured lenders by paying an amount of 20c to the Rand.

Certain secured lenders have indicated that they wish to remain invested in Cell C. These secured lenders will be entitled to loan an amount equal to the 20c received, back to Cell C under a new loan arrangement (Reinvestment Instrument). The Reinvestment Instrument, which will be interest bearing and secured, will have an aggregate capital face value equal to 2.75 times of the amount advanced. In addition, the participating lenders will be entitled to share pro-rata in a fresh issue of ordinary shares in Cell C at a nominal value. All shareholders of Cell C will dilute proportionately to enable the issuance of these ordinary shares to the participating lenders.

Simultaneously but separately with the issuance of the Reinvestment Instrument, Cell C will, pursuant to a rights issue at nominal value, allot and issue shares to TPC. Following such issue and various other issues of shares to be made by Cell C to third parties at nominal value pursuant to the Proposed Transaction, TPC will hold approximately 49.3% of the shares in Cell C, inclusive of those shares which TPC will be entitled to, pursuant to the Reinvestment Instrument.

In addition, CEC (a wholly owned subsidiary of TPC) will defer an amount of R1.1 billion owed by Cell C and some of its subsidiaries to it on the date of implementation of the Proposed Transaction (the Effective Date), which amount will be repaid in equal monthly installments over 60 months reckoned from the Effective Date. The actual Effective Date shall be once all conditions precedent to the Proposed Transaction have been fulfilled or waived.

Liquidity requirements

In order to further assist Cell C with its working capital requirements, TPC shall:

  • purchase Cell C pre-paid airtime for a purchase price of R1.2 billion (inclusive of VAT) on the Effective Date; and
  • purchase, by way of four further quarterly payments of R300 million (inclusive of VAT), additional pre-paid airtime, with each such quarterly payment payable at the beginning of each calendar quarter. The first such quarterly payment will be made at the beginning of the 13th month following the recapitalisation of Cell C and subsequent payments will be made at the commencement of each quarter thereafter.

Furthermore, in conjunction with other third parties, TPC shall undertake to purchase certain minimum levels of pre-paid airtime from Cell C in accordance with an agreed monthly schedule or otherwise in accordance with market requirements.

The pre-paid airtime to be acquired by TPC from Cell C pursuant to the above pre-paid airtime transactions, forms part of the average monthly pre-paid airtime acquisitions by TPC of Cell C pre-paid airtime in the ordinary course of business.

TPC will raise c.R1.6 billion of the required funds from financial institutions, through an Airtime Purchase transaction, for the purpose of facilitating the Proposed Transaction, and will have an obligation to repurchase such airtime over a 24-month period in equal monthly instalments. The financial institutions have provided the requisite credit approvals in respect of the airtime purchase transaction, which are subject to the conclusion of all legal documentation and fulfilment of all conditions precedent under such legal documentation.

Other inter-related transactions

In addition to the conclusion of the Umbrella Restructure Term Sheet, the following transactions will be implemented and agreements in respect thereof have been concluded (conditional upon the Proposed Transaction) being unconditional (save for conditions related to such arrangements being unconditional or implemented) whereby TPC will acquire:

  • from certain funders to Cell C their right to reinvest in the Reinvestment Instrument available to them for a purchase consideration of R1 from each such funder. Following such acquisition by TPC of such rights, TPC will invest an aggregate amount of R110 million into Cell C via the Reinvestment Instrument;
  • debt notes in Cedar Cellular Investment 1 (RF) Proprietary Limited, a shareholder in Cell C, for a purchase consideration of USD500 000 and R16 million;
  • a credit claim of USD6 million against Cell C for an amount of USD4 million, and which claim will then be subject to a compromise as between TPC and Cell C;
  • certain trade claims against Cell C, which claims shall be acquired for an aggregate amount of R16 million and USD4.5 million and which claims will then be subject to a compromise as between TPC and Cell C.

Subsequent events

Certain of the Secured Lenders of Cell C, are holders of formerly publicly listed notes issued by Cell C described as USD184 002 000 8.625% First Priority Senior Secured Notes. Shareholders were notified of the convening of a meeting of the holders of the Notes (Noteholders) for Noteholders to approve an extraordinary resolution which, among other things, will give effect to the compromising of the Noteholders' claims (Compromise Offer).

In terms of the Compromise Offer, Cell C shall, inter alia, restructure its debt owing to certain secured lenders totalling c.R7.3 billion, with such amount being fixed as at November 2019, by compromising the secured lenders' claims by an offer of 20c to the Rand.

The Noteholder meeting was held on 5 July 2022 and Noteholders with the requisite majority voted resolutions in favour of, among other things, the compromise offer as set out in Cell C's consent solicitation memorandum.

The binding long-form agreements are expected to be completed in their entirety shortly. It is anticipated that the recapitalisation process, the completion of which has endured for longer than initially anticipated, is expected to close by mid-September 2022.

Classification of Cell C Limited as an associate

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 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 share of the value-in-use of Cell C as at 31 May 2022 remained at Rnil value. The key assumptions applied in determining the value-in-use calculations are as follows:

May 2022 May 2021
growth rate
growth rate
Cell C Limited 15.6 4.0 16.3 19.9 4.0 18.8

A limited scope desktop valuation was performed in order to determine the value-in-use of Cell C based on cash flow projections incorporated in its five-year 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. The discount rates used are pre-tax and reflect specific risks related to Cell C. The valuation does not take into account the effects of any planned future restructuring or recapitalisation.

The Prepaid Company's equity share of the value as at 31 May 2022 remained at Rnil, however, there was a decline in value compared to the prior year attributable to the following:
a. an increase in interest-bearing borrowings due to unfavourable exchange rate fluctuations and capitalised interest expense;
b. a decrease in cash flow generation over the forecast period; and
c. a decrease in the assessed loss tax shield value due to delayed utilisation thereof.

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

Concentration of credit risk:
Trade receivables 2 612 065  1 677 193 
Loss allowance on trade receivables to Cell C (26 717) (4 220)
Payables due to Cell C:
Trade payables (851 473) (456 902)

The Airtime Purchase transaction and the Umbrella Restructure Term Sheet referred to above are non-binding and do not create any unilateral obligation on the Groups behalf. There are no guarantees issued by the Group relating to any obligation of Cell C.

There is indirect exposure to Cell C as a result of the derivative liability. This results from the potential extinguishment of the derivative liability, linked to the solvency and liquidity of Cell C.

There is indirect exposure to Cell C as a result of the subscription sharing arrangement.

Summarised financial information

Principal activity: Mobile network

Country of incorporation: South Africa

Financial year-end: 31 December*

31 May 2022 
31 May 2021 
Statement of financial position 
Non-current assets  12 833 049  13 565 997 
Current assets  5 305 662  6 228 984 
18 138 711  19 794 981 
Total equity  (8 007 848) (5 559 338)
Non-current liabilities  5 280 021  5 800 315 
Current liabilities  20 866 538  19 554 004 
18 138 711  19 794 981 
Effective percentage held (%) 45  45 
Net assets  (8 007 848) (5 559 338)
Company net assets  (15 307 778) (12 859 268)
Carrying value of purchase price allocations net of deferred taxation  7 299 930  7 299 930 
Interest in associate  (3 603 532) (2 501 702)
Goodwill  1 317 776  1 317 776 
Accumulated impairment  (2 521 152) (2 521 152)
Accumulated losses not guaranteed  4 806 908  3 705 078 
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 2021 to 
31 May 2022 
1 June 2020 to 
31 May 2021 
Revenue 13 302 733  13 954 861 
Net (loss)/profit before taxation (2 448 510) 2 363 748 
Taxation —  89 619 
Net (loss)/profit after taxation (2 448 510) 2 453 367 
Other comprehensive income —  — 
Losses not guaranteed/(profits not recognised)** 2 448 510  (2 453 367)
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.
** The Group will resume recognising its share of the profits only after its share of the profits equals the share of accumulated losses not recognised.

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 TPC on a monthly basis. This would have resulted in the Cell C facility reducing to Rnil by 31 March 2021. However, as at 31 May 2021, the above funding had declined to R182 million, as a result of TPC purchasing from the security airtime. This outstanding balance was paid by way of the TPC purchasing approximately R35 million per month from the security airtime, commencing June 2021. The facility has been settled at year-end.