Cell C, Optasia and the dependency discount

Two IPOs from last November have both failed to impress. At its lowest point in June, cellular services group Cell C was down almost 20% from its listing price, while fintech specialist Optasia had fallen almost 30%. What makes this performance striking is that neither company has materially changed its outlook since coming to market.

Some market watchers will put it down to timing. Both IPOs were launched during a buoyant period on the local bourse, with the top 40 up 34% year to date at the time of listing. That was compounded by the typical IPO dynamic, where share prices often reset lower once the initial excitement fades.

The circumstances of the two listings were, of course, quite different. Optasia came to market with obvious momentum. Its offer was oversubscribed and it listed at the top end of its intended price range. There was therefore more optimism embedded in the valuation and more air to come out once investors began reassessing the risks.

Cell C’s IPO, by contrast, was difficult from the start. Its initial indicative offer price range of R29.50-R35.50 a share had to be cut to R26.50 a share. Blu Label Unlimited was also unable to sell as large a stake as it had originally hoped. In the end, the IPO was effectively rescued by Blu Label shareholder Allan Gray, which took close to half of the public float.

But there is one important similarity between the two companies, and it may help explain why both share prices have struggled. Both depend, in different ways, on the infrastructure and commercial co-operation of mobile network operators such as MTN and Vodacom to reach, serve or monetise customers.

That’s probably what the market is trying to price. Who really controls the customer relationship? How durable are the contracts? What happens when key partners renegotiate? And how much bargaining power do these companies really have when the infrastructure they rely on is owned by someone else?

Of course, this dependency risk was known at listing. So why does the market suddenly care about it now?

The apparent catalyst was MTN’s capital markets day on June 10.

The MTN factor

In Optasia’s case, MTN signalled that it wants to move further up the fintech value chain, particularly in lending. Management said it was accelerating its “bank tech lending” roadmap across its footprint and, where necessary, would seek to augment its licences so it could “use our own licence to deliver loans to our customers” and also “lend against balance sheet”.

That matters because Optasia’s model depends on mobile operators remaining willing to outsource or partner on digital credit, airtime advances and related microlending products. If MTN increasingly seeks to capture more of the lending economics itself, platforms such as Optasia risk being pushed lower down the value chain, from strategic fintech partner to technology vendor, scoring engine or risk-management supplier.

The statements from MTN at its capital markets day could also have implications for Cell C. The key issue is wholesale access. MTN South Africa CEO Ferdi Moolman explained that the “objective with wholesale has always been to sell spare capacity in the network and generate cash”, but he also made it clear that MTN is reassessing how it prices and manages mobile virtual network operators (MVNOs) and national roaming partners.

MVNOs can be valuable where they give MTN access to customer segments it struggles to reach itself, but national roaming partners such as Cell C are more complicated. They are mobile operators in their own right, with their own charging systems, customers, assets and spectrum. They also compete directly with MTN.

Moolman acknowledged that the original Cell C agreement unlocked significant value for MTN. “When we initially went into these agreements, specifically with Cell C, it added substantial value. We got access to spectrum. We could take a lead in terms of 5G in the country. We could utilise that spectrum for more efficient coverage, less capex, etc.”

But the market has changed. “The MVNO market has evolved exceptionally quickly over the past three or four years,” said Moolman, with some players now treating telecoms as a loss leader – behaviour he warned could lead to “some element of value destruction”. That appears to speak directly to the rise of aggressive low-cost prepaid propositions, potentially including Capitec Connect, which is an MVNO partner of Cell C.

As a result, MTN is moving to a more disciplined wholesale framework. Historically, pricing was based largely on capacity and price, with quality playing a smaller role. The new framework will focus on four pillars: price, capacity, quality and segment. As Moolman put it: “If you want high quality, you need to pay a premium price.” He also warned that MTN does not necessarily want to empower MVNOs that sit “slap-bang within an area where MTN already has market share”, because that risks cannibalisation and erosion of market value.

Competing operators

That raises obvious concerns for Cell C investors. Though its relationship with MTN has historically been mutually beneficial, Cell C is still a competing operator that depends heavily on MTN infrastructure for national reach. Moolman said a nondisclosure agreement limited what he could say, but confirmed that MTN was “talking to Cell C at the moment in terms of the pricing framework” and was pushing “to get it done before July” so that the structure works for both parties.

Investors will have to wait to see the details of any new pricing agreement, assuming they are made public at all. For now, there is probably no reason for undue alarm. MTN still benefits from the relationship through wholesale revenue and spectrum access. But it does underline how the economics of Cell C’s asset-light model is subject to a competitor’s stance on wholesale pricing.

Approached for comment, Cell C says: “Cell C and MTN operate under a reciprocal infrastructure-sharing arrangement for the mutual benefit of both businesses and their customers; it is not a traditional roaming agreement. Given the long-dated and material nature of the agreement, periodic engagement between the parties is entirely normal and consistent with the governance of a long-term contract.”

This article first appeared in the Financial Mail. Currency and the Financial Mail are part of the Financial Mail Group.

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