With revenue up 14 percent to more than R10bn and headline earnings per share, at 42 cents Blue Label Telecoms, joint Executive Officers, Mark and Brett Levy, joined Alec Hogg and Gugulethu Cele on CNBC Africa’s Power Lunch, to discuss the interim results. Â
Let’s start off with the big issue that Alec mentioned a while ago. There was an interesting cautionary announcement that was issued last year in October and then disappeared in December. Was Microsoft part of these potential discussions Mark?Â
We knew that question was coming. The suitor is unnamed at the moment.
Why?
Just due to confidentiality between them and us.
Somebody knows though, was it Microsoft, just yes or no? Wink once if it was or twice if it wasn’t.Â
Where do I stare at? The reality for us is we weren’t on the market. This was left field for us. Our board was approached, I think from a fiduciary point of view our board took it seriously. It was seriously enough to look at it. I think that deals, when they fall apart, they don’t fall apart for one reason. They fall apart for a number of reasons. Stuff like, what happens to management? They want us to reinvest in the company and how do we reinvest? How do we participate? What happens to the company? What happens to the strategy and so forth? A lot of these things that when you start unpacking them they start to unravel themselves.
The deal is off. It is not incubated. It is off permanently and, as I said, we are not in the market, looking for a suitor. This is something that really caught us all by surprise, in essence.
However, the worry, from an outsider’s point of view, is that your share price moved up towards the time of the announcement. It came from around R8.00 and went to R10.00. While negotiations were pretty sweet, it was at R10.00. Then quite some time before the cautionary was issued that things had gone on track, this price started going down. You chaps didn’t sell any shares but it does appear as though there was quite a lot of excitement, in some areas of the investment community, over this transaction. Now, you just say to us, ‘sorry, we’re not going to tell you who it was’. You need to give us a little bit more of a feel on what it was that they liked about you and then, on the other hand, what it was that they finally walked away from. Just give us some more insights because a lot people bought or sold shares.
Look, I think the buying and selling are always speculators. I think people like to make a quick buck. I think your long-term value investors, if you go and look at your register I guarantee that they are up the ante or down the ante in that process. I think a lot of those movements are people saying, ‘well if a company is going to delist there’s going to a be premium’, whatever that premium is that they calculate it at ten, 20 or 30, or whatever the premium is at the end of the day is. Therefore, if I buy now and they sell then I can make a quick X-amount of return. I think from my perspective that spike in pricing is due to speculators, trying to get in and make a quick buck.
All right but what did they like about you?
What excited them most was our global footprint. Our ability to have these massive presences in the likes of India, in Mexico, in South Africa, and those are major channels for global advancements, so you could pivot Mexico into Latin America. You could pivot India into Asia and all those countries. You could pivot South Africa into Africa. I think what we’ve done very well is to create this unique distribution system that allows you to pivot very effectively and very efficiently in these markets. It is easier to buy than to build because when I tell you we’ve got 150 thousand there. You go and work out how long it is going to take you. You can have all the money in the world. It is just going to take you time, so you are buying speed to market. You’re buying presence and you are buying know how.
Someone else might find that appealing as well. Brett, just from your perspective, last time we spoke here you were very excited about Cell C. This morning Cell C have appointed Goldman Sachs, or Cell C’s parents have appointed Goldman Sachs to have a look at the future, in other words, ‘let’s find a buyer’ or ‘do something about it’. Is that going to affect you?
Not at all. I think we have contracts with Cell C in place. I think Saudi Oger, or the parent company, has probably been looking for some time. Not necessarily to definitely sell a piece or to sell a whole. I think they would like to bring someone else into it. That is what I read into it and I think Cell C has made a lot of inroads, I really do. It doesn’t mean it is going to be the number one or the number two network, but I think they were a little bit underestimated, definitely in my opinion, and they’ve definitely made a good impact on the market. If nothing else, what they’ve really done is they’ve really price to almost the right price for the consumer. They really have been a consumer champion price, whereas consumers are paying definitely better. Yes, I do think you will see a few changes in Cell C and I do think that it will be for the better.
For us, as Blue Label, no, I think whatever happens there we are well entrenched, we are doing a lot with them, and we are very excited about where they’re going.
The cuts and the pricing of these mobile products and airtime. Does it impact on your numbers?
Not yet, because we work on a Rand spend really, so if a customer spends R40.00, and he/she can now call at three times the amount of calls. They still spend the R40.00. I think that one day, when we do get affected, and I’m not quite sure if that ever happens; if our consumer can spend R38.00 and talk as much as that they want to because, right now, you really can do… Your R40.00 or R50.00 buyers are maybe your one or two phone calls a month. If you can spend R20.00 and do as many phone calls, yes that will affect us. I’m not quite sure if we will ever get there.
What’s the Multi-Links Telkom story? I see in your results, you say that that is now unsettled.
We are not in the business of litigation, so what we did was we went down a road. As a board, we made a conscious decision that it is better to work with a company and make money with them than from them because, at the end of the day, even if you feel that you were wronged. We’d go to court and the lawyers would make a lot of money in this process. Get a settlement, whether they did or we did. I think we had a good fighting chance. There is no share appreciation. There’s no value proposition, besides potentially, a bit of an extra dividend in it and maybe a downside if you had lost it. In our world, as a board, we took a conscious decision is, it is better to make friends and work out how to work together and work out how to make money with one another.
I think anybody would agree that that’s a sensible approach but why did it have to get as nasty as it did?
I think one doesn’t like to be pushed into a corner and having long-term contracts cancelled, and things like that happening. I think we needed to stand our ground and show that you can’t just treat people and do things like that. This has been a four-year journey, so maybe the world is not paved by always following those. We tried to sit around the table. We tried to amicably, do this. They had a lot of change in management structures. There were a lot of people that you couldn’t communicate with. This new management structure was a lot more amenable to discussing things, and I think that is what makes the world of difference. When you are talking to an abyss that no one wants to deal with stuff it makes it a lot more complicated to try and get answers from.
That is quite interesting because we’ve spoken about Telkom management a lot, and said it really is a ‘dream team’ and your experience of that is, I guess is they are more approachable and more businesslike, it would be emphasised here.
Absolutely, in fact the reason it got to this was because of the change of management, so you can definitely see a new era coming through Telkom. Let’s not talk about their share price, but I think more as a company. The ideas what they are doing. The approachability. The professionalism and your words, exactly that, they are businesslike. Even if you do something at your house, this is a small example. I actually just did a whole thing at my house with ADSL. The whole experience of it is actually a lot better, so they are definitely doing the right things and they are definitely saying the right things, and you can see it, for sure.
Something else that affects a lot of homes in South Africa has to, not only be electricity but water, and that’s the new avenue for you as well.
Look, I think if you look at the positioning of electricity in market. There is currently about nine metres. Government have stated they are going to roll out another nine million. That says there’s 18 million households and you can make the same assumption that every household with electricity has water. Now, what prepaid has done for Municipalities it’s allowed them to reduce their bad debt and it is sure, as time can tell, the same is going to happen for water because I can just imagine what the bad debt provisioning is in for water collections. The Munich’s will have to roll out meters. How quick can they do it? We’re not quite sure, so we will always follow the lag of the Munich’s because there has to be a meter for us to vend. We don’t set tariffs. We don’t set pricing. We don’t benefit of the increasing of pricing. When Eskom increases their price, we get paid on wattage or litres, so as soon as they can roll it out is as soon as we can start vending. Electricity is a great story. It went from a R3m revenue business in year one, to R10bn in year four-and-a-half, and I think the same could load well for water, assuming they can roll out metres quick enough.
A great opportunity. Just to close off with and I know the value investors have been liking your stock. This 15 percent core or headline earnings growth, 17 percent core.  Is this the sustainable number?
Yes, we believe so. I think what we tried to put across this morning was the past is the past. We’re talking about six months that have passed and what we are really excited about is where we are going to, so the next six months, our year-end is May, it really looks good and I think, more importantly past that, really looks good. We’ve got ticketing coming on. We’ve got a whole new product service. We’ve got money transfers. We’ve got these acquisitions, so yes; I think in a hard market, I don’t think it is easy out there at the moment actually. I think South Africa has seen a bit worse, than what it looks like, but I think we’re doing good and for us, we are really excited. We do think it is sustainable and hopefully we can push on from here. It looks like it.
Thanks Brett and Mark Levy, they are the joint Chief Executives of Blue Label Telecoms. A stock that you really need to go and do a little bit of work on. They did list in 2007, at a share price of R6.75 and, just take inflation; you are getting the shares cheap now, at R8.50. If you look at the type of business you have today, compared with the business that they listed, well it is chalk and cheese. It is certainly one to have.
