Saturday, July 23, 2011

South Africa - Cell-C's CEO has left, though the changes of the firm's strategy are still to have full effect

[business live] Lars Reichelt was at the helm of Cell C for just over two-and-a-half years, but in that short time he shook up the lucrative but comfortable sector so much that the best praise they could give him was to say "we are glad he is gone".

Reichelt injected his enigmatic, yet energetic personality into a company that could be best described previously as a leaking ship drifting in the doldrums.

Cell C, which began operations in 2001, was supposed to have brought a new sense of competition into the mobile communications industry by breaking the cozy duopoly enjoyed by its far larger rivals, Vodacom and MTN.

It is 100%-owned by 3C Telecommunications, which is 60%-owned by Oger Telecom SA, a division of Saudi Oger, 25% of which is owned in an unencumbered holding by CellSAf, a broad-based black economic empowerment (B-BBEE) entity representing more than 30 black empowerment companies and trusts, and 15% by Lanun Securities SA, a wholly owned subsidiary of Saudi Oger.

It was hobbled from the beginning, however. Firstly, its shareholder structure meant that Saudi Oger had to support the B-BBEE component, CellSAf. Secondly, the interconnection rate structure - the rate the network operators charge each other for connecting a user from another network to one of their subscribers - meant that Cell C continuously owed the other two operators.

Furthermore, Cell C was heavily dependent on the network of Vodacom as it only managed to roll out base stations in some of the larger cities. This vulnerability was highlighted in 2006 when Vodacom cut off Cell C's subscribers suddenly on a Friday afternoon, one of the busiest times for a network operator. That issue was never fully resolved publically, but it did show that Cell C was the junior partner.

During its first years, Cell C struggled to rise above 2.4 million subscribers, and while it tried various marketing strategies, such as a joint venture with Virgin Mobile, it just could not get the market traction it needed.

Meanwhile, it was bleeding money, causing it to eventually issue two bond tranches at interest rates above 7%, which placed them in the junk bond part of the international fixed-income sector.

Furthermore, Saudi Oger had to make an extensive shareholder loan to bolster the company's finances.

Lars Reichelt took over from the affable, but very corporate, Jeffrey Hedberg just more than two years ago. "While Jeffrey (Hedberg) is a great corporate man and understands management in the telecoms sector well, we really needed someone like Lars (Reichelt) to come in and turn us around," said a Cell C staffer privately at the time.

The Camel-smoking Reichelt immediately convinced shareholders that the best form of defence was attack, and that meant an ambitious five billion rand plan to roll out a new network, offer expanded services, especially in the growing data segment, revamp its internal workings and systems and, very controversially, rebrand the company.

Reichelt also simplified Cell C's pricing structure and the very public expression of just how focused, yet simple, his strategy was, was that it was the one that MPs could understand.

Two years ago, Parliament decided to hold public hearings into the high costs of cellular calls, and especially the interconnection rate. While Vodacom and MTN, in particular, were at the receiving end of the politicians' ire, Cell C's pricing structure was accepted and even received fair praise.

Cell C's new data offering turned that segment of the market on its head. The simple pricing, which included a one-year contract for a monthly fee or an upfront payment effectively offering a two-month discount, took the market by storm. Coupled with using Cell C's newly installed technology, which used a more data-friendly wireless spectrum giving fast download speeds, this service became an instant hit.

"Within one year of launching that service, Cell C was carrying 20 times more data over its network than any of its main rivals, including Neotel," said an industry insider.

The effectiveness of the company's strategy could be seen from the reaction of its competitors.

Suddenly Cell C was hauled in front of the Advertising Standards Authority, especially by Vodacom, for saying that its new network gave a fourth-generation experience, as well as other statements. Cell C lost most of those cases, but received a lot of publicity in the process.

Expanding SA's telecommunications infrastructure also caught Reichelt's attention, but breaking into that proved far more difficult than imagined.

He claimed that Vodacom and MTN effectively blocked Cell C's participation in the new West Africa Cable System (Wacs), which has been landed already.

"They say it is supposed to be an open access system (meaning that anyone with the appropriate licences can use it), but they have blocked Cell C. No reason why," he told I-Net Bridge/BusinessLIVE earlier this year.

However, Cell C teamed up with several others to roll out 12,000 kilometres of fibreoptic cable around the country to expand its network footprint.

The success of Reichelt's strategy is still to be fully measured, but early indications have been positive.

Cell C has more than seven million subscribers now and late last year credit ratings agency Standard & Poor's praised its refinancing of €240 million and of its €400 million senior secured bonds maturing in 2012, through a long-dated new credit facility.

"This refinancing improves the company's liquidity profile. We understand that the remaining EUR160 million is entirely held by Cell C's main shareholder, Saudi Oger," Standard & Poor's said.

Simon Duffy, Cell C's chairman and interim CEO, said the company would release a clearer picture of its finances and market share this month.

Duffy described Reichelt as the "mother and father of the strategy, whom the board has effectively become godparents to". He said the company would continue to implement that strategy, which still had another 18 months to run.

"Lars decided to leave for personal reasons. His contract was for three years and, as is standard practice, we started talking to him six months before the end of it. Lars decided that he could not continue for personal reasons, and while we were disappointed, we accepted them and agreed he should leave immediately," Duffy said.

Reichelt's relatively short tenure should come as no surprise. His career path shows that he stays in a position for two to three years before moving on. Partly this is a result of his relatively short attention span, coupled with high energy levels. His family always stayed in Switzerland, no matter where he had worked.

"I suppose that, because he did not have his family with him, it was a 24-hour working day for Lars," said a former employee.

"He would have a short meeting with you at eight in the morning and then say he wanted to continue it at nine o'clock that night. It was not a request, it was an expectation."

Duffy acknowledged that Reichelt was somewhat of a unique personality, but that they would not be looking for someone exactly like him as a replacement.

"We probably need someone who agrees with the strategy in place and is able to implement it," he said.

While Reichelt has not given any interviews, he did state on social network "Sometimes a man's gotta do what a man's gotta do. Maybe there is (sic) a couple of more chapters to be written. Right now: vacation."

Cell C's smoking CEO left rivals fuming

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