Phoenix rising

When Cell C entered the market 10 years ago, it came up against not one, but two Goliaths, both of which used every tactic in the book to keep it down. Cell C has since grown terribly slowly, battling to knock down the barriers set up by the incumbent operators, Vodacom and MTN.

The company was cut off at every turn, dodging blockades from regulatory delays to being pelted by radically increased mobile termination rates. However, by far its largest burden has been the seemingly insurmountable debt it has been raking in since it started out, which last year measured around R13 billion.

Following the surprise resignation of Cell C`s leader and turnaround specialist Jeffery Hedberg last year, Cell C appointed Swiss-born telecoms specialist Lars Reichelt to take the reins. Over the last year, Reichelt has been working miracles on the business, tackling issues that analysts say will see the company rising from the ashes.

REINVESTMENT

Last week, Reichelt presented the company`s first results since his instalment as CEO in March 2009, surprising media and analysts with the incredible changes planned for Cell C.

In a significant turn for the company, Reichelt has managed to convince shareholders to convert their loans to equity, effectively halving the debt that Cell C has been drowning in over the last few years. Analysts are saying Reichelt must have come to shareholders with a significant business plan to get them to commit to this recapitalisation programme, specifically since the process was started by former CEO Hedberg.

Hedberg, now at Telkom`s operation in Nigeria, once noted that the only feasible way to save Cell C from completely drowning in debt was to get the shareholders to submit to an equity infusion.

Cell C is 75%-owned by Saudi Oger, through Oger Telecom and Lanun Securities, and 25%-owned by CellSaf, a BEE consortium. CellSaf`s investment in Cell C was larger in the early days of the business, but it was forced to sell 15% to Lanun to meet the repayments on the loan it took out to be part of the cellular operator in the first place.

The entirety of the debt owed by CellSaf now lies with Oger, making the recapitalisation process even more significant for Reichelt.

The deal, while not cancelling its debt entirely, effectively gives Cell C room to manoeuvre, and some industry watchers say it essentially constitutes a new beginning for the company.

The programme will see Cell C`s ratio to EBITDA decreased from 9.5 to 4.8, turning around roughly R6.4 billion in debt to equity.

According to BMI-TechKnowledge MD Denis Smit, the recapitalisation programme shows that investors have confidence in whatever Reichelt has brought to the boardroom table. He says it`s likely that two significant changes expected in Cell C are part of the reason the shareholders have finally capitulated.

BIG BUCKS

The new debt ratio provides the company with much needed relief to tackle the telecoms market more aggressively, and will give it more room to take up cash from other institutions.

One of the primary changes that Reichelt has instigated is the company`s aggressive drive into the data space. With a financial reprieve in hand, the company plans to make a R5 billion investment this year into its network.

Reichelt announced last year that Cell C was planning to implement a 4G network and, last week, he gave details about the network and what part it would be playing in Cell C`s plans. While the network is not technically 4G, it can be upgraded using software controls at a later stage.

He says the company has started rolling out a nationwide network that will, for the time being, be based on HSPA+. The company is implementing the network on 900MHz, a band that allows for stronger signal than traditional networks around the country.

Reichelt has signed deals with two global infrastructure powerhouses, ZTE and Nokia Siemens Networks. "They are both implementing software defined radio, which means the network is LTE ready, if spectrum becomes available," he says. The trouble is that it is not certain that Cell C will be allocated spectrum to implement an LTE solution. All the operators, including the 300-odd converted value added network service providers, are gunning for the available spectrum in the band required for LTE, and the regulator has yet to decide how it will be allocated, if at all.

Reichelt would not commit to a deadline for the completion of the network, or the commercial release of an HSPA+ service offering, saying only that it would be released when it`s ready. "We will launch when we are sure we have meaningful coverage and good quality of service," he says.

COOL MOVES

Smit says, along with the new network, Cell C`s plans to sell off bits of its infrastructure that are not active, is also a smart move.

Cell C is in discussions with one or more potential companies to have the dormant technology sold off, and possibly leased back at a later stage. Speculation holds that two companies are at the table, American Tower Corp and Eaton Telecom; however, Reichelt would not confirm for fear of jeopardising the deal.

Analysts say this kind of deal is a global best practice and Cell C would be getting the chance to plough some more money into its debt. "This will give us an opportunity to monetise these assets where we would not have been able to before," says Reichelt.

Fuelling speculation that Eaton is involved in the discussions, the tower company last week appointed an ex-Plessey man, Pieter Nel, to head up its South African operations. The company plans to own and operate passive telecommunications infrastructure assets across Africa.

Smit says the tower deal is just one more of Reichelt`s shrewd moves in the market over the last year. He welcomes the concept, saying telecoms operators around the world are looking at solutions like this.

Smit adds that, with a saturated voice market, all the telcos are looking at data opportunities with more intensity, and the tower deal, coupled with Cell C`s data network roll-out, puts the mobile operator in a new competing position.

STRIPPED DOWN TO BE BUILT UP

Chris Gilmour, Absa Investment analyst, says there is still a mountain of work ahead for Cell C; however, he says all Cell C really has to get right to make itself aggressively competitive is its service.

For years, the local telecoms industry has been characterised by poor customer service, and Cell C has not been exempt from that reputation. In the early days, the operator did not even have its own call centre.

Reichelt has placed a new emphasis on the service aspect of the business, by building a new customer care facility in Parktown, and creating an entirely new look and feel for its storefronts. "We are taking a serious customer focus and you can get free coffee if you go in to get help," says Reichelt.

Cell C will also be stripping its billing system, implementing a totally new one, from the ground up. While Reichelt will not say which company is rolling out the new system, he says it`s a large global business, sparking speculation that it`s IBM.

GET TO THE BUSINESS

Gilmour says that, while Cell C`s future is looking brighter, it needs to start tackling the big guns on their own turf. Both MTN and Vodacom have invested significant amounts of money in tackling the business market, something that Cell C has yet to really get into.

He says if Cell C wants to be sustainable, it needs to go after the corporate client. Reichelt has made investments into transmission from Dark Fibre Africa and data centre space from Neotel, which could lead to possible services for the business client. Reichelt believes the changes he is making to the business will see it flourish over the next few years, and has attributed the company`s success over the last year to a dogged team at the company.