Raid leads EOH to rethink purchases
Governance structures at EOH, once a darling of JSE stocks, had to be reviewed and strengthened after a business that
EOH planned to buy was implicated in corruption, its chairman Sandile Zungu said on Friday.
EOH was in the process of reversing the purchase, made in 2015, of Forensic Data Analysts, Grid Control Technologies and Investigative Software Solutions owned by Keith Keating and other shareholders.
The deal was subject to profit warranties being met. But this week the home of Keating was raided by the Independent Police Investigative Directorate as part of an investigation into the irregularities in contracts that Forensic Data Analysts had with the State Information and Technology Agency (Sita) and the police.
Zungu said the EOH board planned to meet early this week to discuss, among other things, the possible financial implications of EOH’s decision to reverse its 2015 purchase of three businesses.
Earlier this year EOH was implicated in a report by investigative journalists at AmaBhugane of irregularities in social grant IT contracts worth millions of rand, but it was cleared of wrongdoing.
The developments concerning Keating led to the EOH share price falling 34% on Thursday, but it recovered some losses before the close on Friday. EOH said Keating’s businesses failed to meet profit warranties that had been a condition of the deal.
Zungu said: “At the level of governance structures in [EOH] clearly there were weaknesses. We need to strengthen the governance structure so that even the possibility of such uncorroboratable allegations [related to Keatings’ alleged irregular contracts with Sita and the police] must not even arise. The governance issues arising from that need to be taken to the next level,” he said, without elaborating on the steps that would be taken.
EOH, which listed on the JSE in 1998, has a quarter of its operations outside South Africa but the bulk of its revenue is generated domestically from services that include IT infrastructure, apps, automation, legal services and hospital administration services in the public and private sector. It operates in 50 countries with about 12 500 employees.
Ryan Seaborne, a money manager at the 36One Asset Management, told Bloomberg the company was suffering from a lack of corporate governance and poor communication which created the impression that it was “concerned about something could come out in the public”.
Seaborne said EOH had to clarify the situation over the investigation. “Alternatively I would not buy a single share. They need to reconstitute the board,” he said.
Keith McLachlan, a fund manager at AlphaWealth, said factors weighing on the share price included poor disclosure and questions around the group. The unexpected departure of founding CEO Asher Bohbot in June after 19 years contributed to the mistrust, he said.
The unease among investors this week was partly stoked by the collapse of Steinhoff, whose investors rushed to sell stock.
Ron Klipin, a portfolio manager at Cratos Wealth, said the market was concerned that EOH senior management were not buying shares. But Zungu said he planned to take up further stock “with my own money”.
Klipin said the deals Keating did with Sita and the police had dented credibility.
“It’s the latest thing that has emerged that appears to have got the market rattled,” he said, adding that market was more risk averse following the Steinhoff debacle.
The JSE had been in touch with EOH, according to John Burke, director of issuer regulation at the bourse.
Burke said EOH “confirmed to the JSE they were not aware of any price-sensitive information which would require an announcement”.
Based on the unusual volatility in the share price, the company had issued a voluntary announcement, he said. The JSE would act on any reports or identification of potential market abuse.
Zungu said the audit committee “will inform the board what next to do”. The audit committee would review the impact of reversing the purchases.
“We want to go back to the investor community and public at large with detail,” he said.
EOH was unlikely to collapse, he said. “The underlying business is fundamentally very strong. We have strong businesses. We do not have debt facilities that can be pulled by a bank. We have no bonds that will mature. We are basically ungeared,” said Zungu.
The company was talking to shareholders. “I don’t think people must sell in fright because they will be disadvantaging themselves. We need to quantify issues, losses and that’s what we’ll do next week.”
Sita said it had handed over the relevant information to Ipid.
“We are committed to collaborate, support and work with all government institutions, to ensure that the rule of law applies equally to all,” it said. It is not conducting an internal investigation.