Background reading

Reading One

Cell C is set for a takeover, likely to be MTN

By Dineo Faku25 May 2020

Cell C is set for a takeover by one of the largest network providers, with the Competition Commission finalising the terms of the transaction. Business Report understands that the sale would likely see Africa's biggest network provider, MTN, assuming a significant stake in Cell C. On Tuesday, the Competition Commission briefed Parliament's portfolio committee on trade and industry on the terms of the transaction.

MTN dismissed the Cell C purchase as speculation. "MTN does not comment on market speculation," said a company spokesperson. But Cell C confirmed the merger without disclosing who the interested party was. The group said the merger was part of a restructuring process that began last year. It said it was involved in ongoing discussions with financiers and relevant stakeholders to finalise the transaction. "These discussions are of a confidential nature. Cell C will make an announcement upon conclusion of its restructuring process," said the company.

Cell C has been in distress for years, with a R9 billion debt burden and several own goals that placed it on the back foot relative to its rivals. In March, the group introduced a turnaround strategy focused on restructuring its balance sheet and improving its overall liquidity. Cell C also negotiated an extended roaming agreement with MTN, to enable it to have access to MTN's network in areas where it does not have coverage after moving away from Vodacom in favour of MTN's infrastructure. Industry experts believe the roaming agreement signalled the merger between the two companies.

Cell C's new chief executive, Douglas Craigie Stevenson, previously said the roaming agreement was meant to manage its network capacity requirements in a more scalable and cost-efficient manner. "This will also provide access to current and future technologies," he said.

Problems at Cell C resulted in JSE-listed Blue Label Telecoms, which paid R5.5bn for a 45percent stake in Cell C, writing off their full equity ownership in the company to zero last year. Cell C defaulted on repaying interest on an R2.7bn loan note that was due in December, as well as interest and capital repayments related to the respective bilateral loan facilities with Nedbank, China Development Bank Corporation, the Development Bank of Southern Africa and the Industrial and Commercial Bank of China which was due in January 2020.

Cell C said it was starting to see green shoots, and its operating loss during the year to the end of December 2019 narrowed to R3.94bn from R7.36bn in 2018. Cell C reported a 21 percent decline in prepaid customers to 2.9million in 2019, and said the margin on existing customers was better as a result of acquiring profitable customers.

Commissioner Thembekile Bonakele told the portfolio committee on trade and industry that the ant-trust body was working on finalising the terms of the merger. "We have seen firms in distress which include an acquisition of Cell C. Cell C has been in trouble for a while now. We have a merger before us that we are finalising, that should see Cell C being rescued and surviving and those jobs being saved," Bonakele said.

Extract sourced from: https://www.msn.com/en-za/money/markets/cell-c-is-set-for-a-takeover-likely-to-be-mtn/ar-BB14oNRg

Reading Two

Experts agree Cell C-MTN deal is good for industry

Though some have seen the roaming agreement as a merger of the two operators, no business control has been ceded.

04 DECEMBER 2019 - 16:34 MUDIWA GAVAZA

The conclusion of the long-negotiated, expanded roaming deal between Cell C and MTN has brought into question what the agreement means for competition in a saturated mobile industry, as some have seen it as a merger of the two operators. The question seems to be a matter of how much control MTN may have over its smaller partner, or the degree to which the agreement results in the two companies' operations becoming intertwined, though experts agree that the deal is good for the industry. Angelo Tzarevski, senior associate in the competition and antitrust practice at law firm Baker McKenzie, said for the conclusion of the roaming agreement to constitute a merger for competition purposes, one party would need to acquire control over the business or productive assets of the other.

Cell C and MTN have been in talks for some time. The network headed by new CEO Douglas Craigie Stevenson already has access to MTN's network in areas where it does not have coverage, after recently moving away from Vodacom in favour of MTN's infrastructure. In 2018, Cell C and MTN initially agreed to provide 3G and 4G services in areas outside the main metros. The expanded roaming agreement extends this coverage and gives nationwide roaming to Cell C subscribers, the operator said.

The roaming agreement will cause Cell C's 4G network coverage to be extended to 95% of the population. Cell C customers will have access to more than 12,500 sites, of which 90% are long term evolution (LTE) enabled. LTE is a standard for wireless internet connectivity, allowing for faster speeds and stable connections online.

The deal makes no provisions for sharing or selling of spectrum. Cell C retains all its own spectrum and each party will use its own frequencies. The two networks' infrastructure will remain independent but both parties will have the right to roam on the other's network.

Director and analyst at Africa Analysis Dobek Pater said MTN and Vodacom have been trying to de-risk the lack of additional spectrum by entering into partnerships with Rain, for Vodacom, and Cell C, for MTN, whereby they are able to use the partner operator's spectrum to improve their respective 4G networks through cell site densification and expansion. This is a strategy to mitigate the lack of spectrum, until recently held back by the government, he said.

Therefore, from a competition point of view, the agreement between Cell C and MTN should not result in unfair competition in the market. On the contrary, it presents potential hope for Cell C's survival (not guaranteed) and would preserve the third largest service provider in the market. This should enhance, or at least not diminish, competition in the market.

In contrast, Tzarevski said in 2015 MTN and Telkom attempted to conclude a network management services agreement and reciprocal roaming agreements which would effectively let each party roam on the other's mobile network. This gave rise to an acquisition of control by MTN as it would take over the financial and operational responsibility for the rollout and operation of Telkom's radio access network, including its spectrum capacity.

The Competition Commission raised concerns with that transaction, which was ultimately abandoned by MTN and Telkom, Tzarevski said. The roaming arrangement between Cell C and MTN does not appear to involve an acquisition of control but merely the provision of roaming services, he said.According to financial results from the operators, Vodacom holds a 40% revenue share, with MTN and Telkom at 26% and 25%, respectively, and Cell C having 9% of the pie.

Andrew Kitson, head of ICT Research, Telecoms, for Fitch Solutions, said Cell C is likely to cannibalise some of MTN's customer base through this new roaming agreement, but MTN may choose to double-down on premium customers in these areas, leaving Cell C to mop up the lower-value customers that otherwise drag on its bottom line.

The latest agreement merely ensures that the playing field becomes more level and enables Cell C to compete on a more equal basis in terms of access to resources.

Kitson highlighted that the Independent Communications Authority of SA and other competition bodies would need to be involved in any formal merger process. "I understand that the regulator is looking closely at the terms of the new roaming agreement to ensure that no operational merger of the businesses can occur, either formally or informally," he said.

Extract sourced from: https://www.businesslive.co.za/bd/companies/telecoms-and-technology/2019-12-04-experts-agree-cell-c-mtn-deal-is-good-for-industry/

Assignment Questions (100 Marks)

MTN is one largest network providers on the African continent. In recent years, there has been speculation in the media about an impending takeover of Cell C. If this transaction materializes, the combination of MTN and Cell C could change the dynamics in the mobile telephone and network industry in South Africa.

You have been hired as a strategy consultant to advise the board of directors of MTN on the most effective way of handling this acquisition. What advice would you give them regarding the different phases of the merger and acquisition (M&A) process? Is the acquisition of Cell C by MTN viable in the current economic climate in South Africa? Critically discuss.