By Alec Hogg
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But after reading the latest update on the JSE’s SENS service yesterday, the stock that’s got me excited is one in our other portfolio, the SA Champions. Those who followed my writing and presentations after the annual Berkshire AGMs will recall that I’ve been a fan of Blue Label Telecoms for a couple of years. Mainly because it was such a great “value” investment.
Although the business has grown beyond recognition from the one that listed on the JSE in 2007, the share price did nothing for nine years. Adding to the appeal is its transaction with Cell C, a classic enterprise transforming deal. It is what Warren Buffett describes as a “fat pitch” – an opportunity that arrives rarely in any lifetime.
The Saudi owners of Cell C have struggled since being granted South Africa’s third mobile network licence in 1994. Ongoing losses required continuous capital injections, with highly efficient Vodacom and MTN successfully blocking its every attempt to break into profit.
Cell C’s shareholders rolled the dice one last time in 2012 when appointing Vodacom’s founder Alan Knott-Craig as the CEO. During the aggressive entrepreneur’s two year reign, the company invested heavily in expanding its network and slashing prices. That resulted in the customer base surging from 9m to the current 25m. But a stroke prevented Knott-Craig from completing the adventure. And the fatigued Saudis finally threw in the towel.
Enter Blue Label and its December 2015 announcement to acquire 45% of a recapitalised Cell C for R5.5bn. This is ten times bigger than anything Blue Label has previously attempted, and a rare opportunity to effect vertical integration. The company sells billions of rand annually in airtime; tablets; cheap smart phones and content – products that can easily be plugged into the Cell C distribution channel to mutual benefit. It has also brought in Net1 as a 15% shareholder in Blue Label to fund R2bn of the Cell C investment, and negotiated the target’s maximum debt down from an initial R8bn to a more manageable R6bn.
In capital intensive projects (eg property development) the initiators often go bust. That generates a superior return by the brave buyers who come in next, picking up assets for cents in the dollar. That’s what Blue Label is getting with Cell C. The deal will be finalised by end June. Its share price is not yet reflecting the massive potential.
