Blue Label has concluded a non-binding term sheet that they colourfully refer to as an Umbrella Restructure Term Sheet. I’m confident that neither Santam nor Rihanna were involved at any stage in this, although Blue Label shareholders may want insurance and music to make them feel better about the complexities here.

The purpose of this fancy document is to facilitate the restructuring and refinancing of Cell C, the telecommunications network that has just never found a way to successfully compete in the market.

Nevertheless, another attempt is about to be made, despite Cell C posting a net loss of R849 million in the six months to November 2021 and boasting a balance sheet with net negative assets of R13.7 billion.

At least Cell C generated a profit before finance costs and forex losses of R862 million, so perhaps there is some hope with a sustainable balance sheet. Blue Label believes that Cell C has implemented a turnaround strategy, which means it has reduced costs and achieved efficiencies.

Arguably the biggest change is the move to a variable operational expenditure model vs. trying to own a fixed cost infrastructure and scale the business to the point where that model is viable.

The proposed restructure of Cell C’s balance sheet is extremely complicated. Prepare yourself.

Cell C owes certain secured lenders around R7.3 billion. They are in for a rude awakening, as this deal would see Blue Label lend R1.46 billion to Cell C, an amount that will be offered to those lenders as a compromise (20 cents in the rand). The actual funding obligation for Blue Label will be just over R1 billion.

In perhaps the ultimate example of buying the dip, certain secured lenders want to take the 20 cents in the rand and loan it back to Cell C under a new loan arrangement. The aggregate face value will be equal to 2.75 times the amount advanced. In other words, if Cell C ever makes money and can pay this back, the lenders would receive 55 cents for every 20 cents. In addition, they can share pro-rata in a fresh issue of ordinary shares in Cell C at a nominal value.

Blue Label is participating at that level, by acquiring the reinvestment rights from certain lenders. This will enable them to invest R110 million into Cell C in this ratcheted face value structure. On top of this, Blue Label is buying debt notes in a shareholder in Cell C for USD5 million and R16 million (there seem to be two different types of notes denominated in different currencies, but the SENS isn’t clear on this) and a credit claim of USD6 million against Cell C for USD4 million. Blue Label will also buy trade claims against Cell C for R16 million and USD4.5 million.

Blue Label is also owed R1.1 billion by Cell C under a separate loan. This will be repaid in equal instalments over 60 months.

Cell C will undertake a rights issue at nominal value as well as various other issuances, with the net result that Blue Label will hold 49.3% of Cell C.

To help inject some life into Cell C, Blue Label will purchase R1.2 billion in pre-paid airtime from Cell C. Blue Label’s business is built around distributing pre-paid airtime, so this makes sense. There will be additional quarterly airtime purchases by Blue Label of R300 million.

To make this all happen, Blue Label will raise R1.6 billion of the required funds from financial institutions through an airtime purchase transaction and will be obligated to repurchase the airtime over a 24-month period in equal monthly instalments. I’m no expert on a structure like this, but it seems as though banks are essentially financing the purchase of airtime and taking ownership of it over the loan period to manage their risk.

As any long-suffering shareholder of Blue Label will tell you, the company’s dealmaking track record isn’t great at all. Blue Label has tried to do many exotic things, both in South Africa and abroad. The share price is down nearly 69% in the past 5 years.

The share price fell 11.3% yesterday after the announcement came out at 3:30pm. Punters didn’t wait long to hit the sell button.

In summary, Blue Label has effectively refinanced Cell C through pre-selling airtime. That’s an interesting strategy, provided there is enough demand for the airtime of course. Only time will tell.