THE TROUBLE WITH EOH

The once high-flying tech firm has been firmly drawn into the centre of SA’S corruption epidemic, raising questions about its due diligence

Technology company EOH must be thanking its blinking red ticker that furniture firm Steinhoff hit the wall quite when it did. Otherwise the precipitously steep drop in the value of the company founded by Asher

Bohbot in 1998 would have made EOH the poster child for the biggest investment disaster of 2017.

As it is, it’s already been a brutal reality check for a company that, until recently, was a much-courted darling of the JSE. For years, EOH’S stock has been heading steadily upward (up 459% over a decade) as it swallowed rivals using its own high-flying shares as currency. Profits soared more than 30%/year.

The problem is, sooner or later you hit a wall. First, you end up scraping the bottom of the barrel for what’s left on the shelf to buy. Then the fact that you’ve been dishing out shares like Transnet board appointments at the Gupta compound comes back to bite you.

So, within 48 hours from Wednesday last week, EOH’S stock plunged 42%. Sure, the price had been slipping for months — it was down 68% over a year — but the rapid drop hinted at some deeper, hidden disaster. Worse: EOH, headed by CEO Zunaid Mayet since July, seemed too paralysed in the headlights to act.

Only days later did the company reveal that the plunge had been partly caused by two of its top brass — Jehan Mackay and John King — being “forced to sell” R143m worth of EOH shares by banks with whom they had some sort of derivatives exposure.

Mayet told the Financial Mail that EOH delayed acting because “information came to us late on Friday”.

He defends King and Mackay: “All they did was take the shares they had and pledge them as collateral for a loan to buy more EOH shares. I don’t think their intentions were questionable.”

But if it all seems like bad luck, Alphawealth fund manager Keith Mclachlan says such nasty surprises become almost inevitable when a company has been as acquisitive as EOH has for so long.

“The vendors who sold their businesses to EOH likely had their life savings tied up in these companies. So they take a large portion of scrip in exchange, and it’s a huge risk, because they need to access money at some stage. This [can] create a huge overhang on the share,” he says.

Perhaps a deeper problem is that when there’s such pressure to keep buying companies, you’re in real danger of making the wrong acquisition calls.

EOH’S worst investment was the R868m purchase in December 2015 of three companies owned by Keith Keating: Grid Control Technologies, Forensic Data Analysts (FDA) and Investigative Software Solutions.

Since 2010, FDA scored R5.4bn in contracts from the police, which the Independent Police Investigative Directorate (Ipid) has flagged as the fruits of a “corrupt relationship” with former acting police commissioner Khomotso Phahlane.

One Ipid report, dated October 25, is a searing indictment of Keating directly and, in a wider sense, of EOH’S due diligence, its acquisitions-at-all-costs culture and its governance.

The details of FDA’S shady police contracts, reported in The Times, speak directly to SA’S rot. For a start, the police bought torches from FDA for R300,000 apiece when that same torch, imported from Australia, costs just R7,000. Your tax money was also used to pay R500,000 for 500 disposable face masks (R1,000 each), R1.6m for distilled water and R129 per set of latex gloves. Had the police popped into Dis-chem, they’d have picked up latex gloves for less than R1 a pair.

In return, Keating allegedly paid R1m to a car dealer for a Toyota Hilux bakkie, Hyundai i20, Ford Ranger and VW Polo for Phahlane and his wife, daughter and sister. Helpfully, these were invoiced to “Joe Doe”.

It’s a good thing EOH said this week it is selling those firms back to Keating because of “a significant underachievement against performance warrantees”.

Mayet rejects the view that this highlights holes in EOH’S due diligence. “We’re quite diligent in the selection of the businesses that join our group. We had a rigorous due diligence process. In this case, we still haven’t seen evidence that any of this was happening through EOH. All the allegations [are that] Keating did [what he did] in his personal capacity,” he says.

This week, EOH hired law firm Edward Nathan Sonnenbergs to (belatedly) conduct a fact-finding review of the Keating companies because, it said, it has a “zero-tolerance” approach to devious behaviour.

That’s the sort of comforting but meaningless cliché you’ll see in every annual report, of course. From here, it seems the only zeros clocking up on EOH’S scorecard are for its due diligence and governance.

Sooner or later you hit a wall, and the fact that you’ve been dishing out shares like Transnet board appointments at the Gupta compound comes back to bite you