EOH need not issue new shares
• Collapse of the group’s share price has made paying for acquisitions with equity a less viable strategy, according to analysts
EOH’s new R3bn funding facility from its black empowerment partner will enable the technology group to pay for acquisitions without having to issue fresh shares, says CEO Zunaid Mayet.
EOH’s new R3bn funding facility from its black empowerment partner will enable the technology group to pay for acquisitions without having to issue fresh shares, says CEO Zunaid Mayet.
The company’s acquisition spree in recent years has been funded largely with shares, although analysts say the collapse of its share price – from about R163 at the start of 2017 to R46 on Wednesday – has made that strategy less viable.
“We’ve got a new funding war chest, so how we fund transactions will vary from transaction to transaction – it may not be with shares, or it could be a smaller proportion of shares,” Mayet told Business Day on Wednesday.
EOH is in the process of splitting its operations in two, with one division retaining the EOH brand and focusing on organic growth, while the other will also target acquisitions. The second unit will launch its own “brand and identity” within coming weeks, Mayet said.
The group said earlier in March empowerment firm Lebashe Investment Group would inject R250m worth of equity into EOH and provide it with a R3bn credit facility. The deal, which the groups discussed for more than a year, will raise EOH’s black ownership to above 51%.
The business earmarked for rebranding “is in a space in the market where there’s significant growth potential and the headroom for acquisitive growth is more significant than in the EOH business”, Mayet said.
“We’ve got pipelines of potential acquisitions across many areas of that part of the business, so the opportunities are certainly there.”
The Lebashe capital injection did not indicate that EOH had needed to raise cash for a particular sizeable deal, however. “It’s really to fund both potentially large infrastructure projects as well as acquisitions.”
EOH said on Wednesday that while its revenue for the six months ended January rose 19% to R8.4bn, operating profit from continuing operations fell 6.4% to R784m as the group sacrificed margins to retain customers and because of project delays from the public sector.
Mayet said the negative and false “noise” in the media about EOH contributed to lower prices being negotiated with clients – which stripped R140m from the bottom line – and R70m in additional operating expenses.
Meanwhile, Mayet said since February the state had begun paying its debts faster.
There were also signs that organisations would start to invest in information technology infrastructure again after a relatively lengthy period of delays owing to uncertainty.
“There are green shoots. We’re starting to have the right conversations, customers are starting to say they can now invest in their businesses and part of that is enabling their businesses from a technology perspective,” Mayet said.
Delphine Govender, chief investment officer at Perpetua Investment Managers, said last week that while the EOH investment case “has started to look interesting given the price falls, something still concerns me”.
Govender said Perpetua had focused more closely on “better quality businesses that are also attractively priced”.