Mark and Brett Levy are formidable entrepreneurs. From virtually nothing, they built Blu Label into a fintech distribution platform through which close to R100bn of economic activity flows each year. Yet little of that success is reflected in the long-term share price chart. Blu listed on the JSE in November 2007 at an offer price of 675c a share, with the stock opening at 826c on its first day. Almost 19 years later, it trades below 800c. Dividends have provided some return along the way, but the nominal capital appreciation has been remarkably modest.
The explanation can largely be summed up in two words: Cell C.
In August 2017 Blu paid R5.5bn for 45% of the mobile operator, a transaction that would ultimately draw Blu into years of additional liquidity support, financial engineering and management attention.
The original investment case was not as irrational as subsequent events make it appear. Blu saw an attractively priced distressed asset that could be recapitalised, restored to financial health and eventually listed. There were obvious commercial synergies with its vast airtime distribution network and, importantly, the deal offered protection against the possibility that mobile operators might one day bypass intermediaries such as Blu and sell directly to customers.
Directors’ fears that they were “betting the farm” were eased by due diligence from international experts and forecasts from Cell C’s then management. But those forecasts were soon being missed. Telkom Mobile had rapidly emerged as a formidable competitor, while Cell C’s heavy debt burden left it ill-equipped to compete in a capital-intensive industry.
The direct financial cost is relatively easy to measure; the opportunity cost less so. For years, cash that might have funded acquisitions, new products or expansion of Blu’s own operations was tied up in keeping Cell C afloat. Presumably, so, too, was an enormous amount of the Levys’ time and attention. For entrepreneurs whose instinct is to identify and exploit new opportunities, that must have been particularly frustrating.
The irony is neatly captured by Mark Levy. “We went around for 10 years convincing people we’re not a telco,” he tells the FM. “And in that 10th year we [finally] convinced everyone, and then we landed up buying Cell C.”
Cell C’s separate JSE listing in November last year therefore marks an important turning point. It gave the previously maligned asset an independent market valuation, returned Cell C to associate accounting, unwound much of the historical funding complexity and, crucially, meant Blu’s financial statements would no longer resemble an advanced accounting exam.
The second half of Blu’s latest financial year, December to May, consequently offers a cleaner view of the underlying business. It was not, unfortunately, an especially strong one.
Normalised ebitda fell from R535m in the first half to about R387m in the second, taking the full-year figure to R923m. Management argues that the comparison overstates the deterioration. Blu typically earns about 55% of its profits in the first half and 45% in the second half (which also bears costs such as staff bonuses), while the first half still benefited from discounted Cell C airtime that disappeared after the listing.
Even so, Blu says trading conditions began to soften from March, meaning just three months of the cleaner second-half period captured the tougher consumer environment.
Dylan Bradfield, a portfolio manager at Sharenet, says the second half was also marred by certain one-offs, adding that xenophobia-related incidents cost Blu R500m in pinless top-ups, or R13m in net profit after tax.
The good news is that Cell C is no longer the financial black hole it once was. It has been recapitalised, operates a more asset-light network model and is profitable. At Cell C’s current market capitalisation of about R8.6bn, Blu’s directly held 49.5% stake is worth roughly R4.3bn, close to 60% of its own market value.
Blu has another sizeable asset that should soon convert into cash. As part of the IPO restructuring, it sold about 16% of Cell C to empowerment vehicle Sisonke on a vendor-financed basis, effectively funding the purchase itself. Management expects that loan to be refinanced by banks before the end of November, releasing about R1.3bn–R1.6bn back to Blu for immediate debt reduction.
Blu’s R3.7bn of net debt at end-May — about four times normalised ebitda — looks onerous. Management argues that this overstates the group’s structural leverage, since about R1.9bn consists of short-duration trading facilities used to fund stock purchases and exploit bulk and early-settlement discounts. The banks exclude those facilities from their covenant debt calculation.
Sisonke is not the end of the Cell C monetisation. Once the IPO lock-up expires in November, Blu intends to reduce its stake gradually to 25%–30%. “We’ll do it very conservatively,” says Brett Levy. “We’re in no rush, because Cell C is really performing well.” Asked whether Blu would consider selling more if an attractive offer emerged for control of Cell C, he says the board would “definitely consider it” if the price was right.
However, more interesting is what lies ahead for Blu’s core business.
Mark Levy says telco-related activities now account for only about 25% of group profits, with the balance coming from areas such as electricity, gaming, ticketing, generic vouchers, advances, payments and data. The attraction of the model is that once the distribution infrastructure is in place, additional products can be layered onto it at very high incremental margins. He says Blu has a healthy pipeline of such products, some of which can scale remarkably quickly. BluVoucher is his favourite example. Turnover of roughly R50m in one December had grown to about R1bn by the next.
He believes that the old disintermediation concern has receded considerably. “We were always the naysayers on disintermediation.” He argues that Blu’s value lies in aggregation, saying there is little incentive for a network to replicate the credit, reconciliation, logistics and distribution functions Blu provides merely to recover a relatively thin margin. The subject, once a perennial concern, is now rarely raised, he says.
So far he has a point. Nearly five years after the VodaPay super-app was launched, Vodacom says just over 10% of its airtime is sold directly through its own channels. That is progress, but hardly the rapid elimination of intermediaries once feared. Brett Levy also argues that some of that share may have been won through discounting, which would make the economics less compelling over the long term.
Of course, disintermediation can come from more than one direction. MTN already deals directly with most banks and, according to Brett Levy, now wants the Capitec relationship currently handled by Blu. His response is guarded: “You’ve got to be on top of your game always and make sure that you add value.”
Of Blu’s core businesses, its Cigicell electricity operation is facing perhaps the strongest headwinds. Traditional electricity-vending commissions fell by R40m to R279m last year despite higher rand throughput, because Blu is largely paid according to the number of kilowatt-hours sold. As tariffs rise, the same R100 buys fewer units, meaning consumers can spend the same amount while Blu earns less commission.
Blu is trying to offset that pressure through revenue assurance, helping municipalities identify billing errors, faulty meters, nonpayment and lost or stolen electricity. For now, the business is therefore as much defensive as it is a growth opportunity. It generated about R66m in net commissions last year, and management believes it could become a “sleeping giant”.
The focus is on large power users. Mark Levy cites Ekurhuleni, where he says about 65% of the potential shortfall sits with just 13,000 large users. “We’re not that interested in hunting a house,” he says. “We’re more interested in looking at these large power users”, where individual billing discrepancies can run into millions of rand a month.
Blu Energy, focused on green energy, is a longer-term opportunity. The group has a 180MW portfolio within what it describes as a 400MW-plus one- to three-year opportunity, with 28MW of rooftop projects already contracted. But management expects a significant earnings contribution only from June 2027 onwards, with projects then generating annuity income for three to 10 years. Encouragingly, given the Cell C experience, Blu intends to keep its own capital commitment low, with management saying outside financiers have shown appetite to fund 90%–100% of individual projects.
Finally, treasury represents a return to Blu’s roots after much of the group’s cash was diverted towards supporting Cell C. With capital becoming available again, Blu can once more buy stock in bulk, negotiate discounts and exploit working capital opportunities. Management says Blu seeks returns of 18%–26% on free cash deployed through treasury, potentially providing a further boost to ebitda.
After spending almost a decade rescuing Cell C, Blu is getting back not only its balance sheet but also its entrepreneurs. The question is whether the Levys can rediscover the formula that built the company while remembering the lesson of the investment that consumed so much capital, time and shareholder value. At 800c, stripping out the roughly R4.3bn market value of Blu’s listed Cell C stake, its core business is trading on an implied earnings multiple of only about 4.4. This suggests the market remains deeply sceptical.
Bradfield believes that financial 2027 is shaping up to be a pivotal year for both companies based on the financial 2026 base. Those numbers already reflect Blu’s core earnings of around 75c a share and Cell C a 92c a share contribution — which suggests a 160c–170c a share headline earnings look-through. “Hopefully management will take the approach to unlock further value in the coming one to two years with significant buybacks.”
