In October 2016, Blue Label Telecoms announced that it had increased its offer to R5.5 bn for 45% equity in Cell C. In December 2015, the company offered R4 bn for 30% equity. The new offer does not change the fundamentals of the refinancing deal. We expect that the new deal will not bring any new added benefit to Cell C.October 2016 Announcement In a SENS note (5/10/2016), Blue Label Telecoms announced that it had increased its proposed equity purchase in Cell C, and now offers to buy 45% for R5.5 billion. The acquisition will be made through its wholly owned subsidiary The Prepaid Company Proprietary Limited ("TPC").  The R5.5 billion will be made up from the following cash sources:

• R2.0 billion via a vendor consideration placement with NET1 UEPS Technologies Inc, through its South African subsidiary Net1 Applied Technologies South Africa Proprietary Limited, at a price of R16.96 per share, which represents a 10% discount to the 30 business day weighted average traded price; and
• R3.5 billion from available cash and funding facilities.

New Refinancing Structure

‍Under the new deal, the equity structure will look as follows:

• the subscription by TPC (The Prepaid Company Proprietary Limited) for shares comprising 45% of Cell C’s total issued share capital for a subscription consideration of R5.5 billion;
• the subscription by MS10 (senior management of Cell C) for shares comprising 10% of Cell C’s total issued share capital;
• the subscription by MS15 (Albanta Trading 109 Proprietary Limited) for shares comprising 15% of Cell C’s total issued share capital; and
• the subscription by 3C (3C Telecommunications Proprietary Limited) for shares comprising 30% of Cell C’s total issued share capital, for a subscription consideration equal to an amount which will result in Cell C’s net borrowings being reduced to a maximum of R8.0 billion at the time of receipt by Cell C of the respective subscription considerations.

In the December 2015 deal announcement, Cell C staff were going to buy 29.42% equity, split in two tranches of 11.77% and 17.65%. Under the current deal, we assume that MS10 and MS15 refer to these two tranches of equity purchases for the Cell C Staff. The Cell staff will now own 25% equity in the operator.Similarly, according to the December deal announcement, 3C was going to retain 35% equity. Under the new deal announcement, 3C will only retain 30% equity in Cell C.The following diagram sets out the proposed new shareholding of Cell C:

Deal impact on Cell C

‍This deal is about refinancing Cell C, reducing its long term borrowings to a maximum of R8 billion, while providing a strategy for the 3C Telecoms shareholders to reduce their risk and exposure through Cell C. The deal offers the opportunity for Cell C management and staff to participate at an equity level, while it provides Blue Label Telecoms an investment opportunity in an industry they understand.The deal will improve Cell C’s profit after tax (PAT) margin by reducing interest payments. However, it will have no significant impact on the operator's operational performance. The deal gives Cell C better access to future funding through Blue Label Telecoms.‍

Deal impact on the market

‍We don't expect the deal to radically change Cell C's strategy. Cell C has already embarked on an aggressive subscriber acquisition strategy.The challenge for Cell C is that it has not translated its successful subscriber acquisition into revenue market share. Cell C has grown its market share, but its share of the mobile revenue has not grown in proportion to its subscriber growth.Over the coming year, we expect Cell C to focus on growing its revenue market share by attracting the higher value customers to its network. Cell C is using new product innovation and pricing to draw in high value customers.