EOH announces R600m rights issue to ease crippling interest bill

Tech services group EOH says it will raise R600 million by way of a rights issue to ease a debt burden currently costing more than R200 million a year in finance charges.

It’s been a long and agonising road back to financial respectability for a group that featured prominently in the Zondo reports into state capture. New management under CEO Stephen van Coller was brought in to sweep away the culture of corruption that had taken root at the company and implement a turnaround plan.

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The announcement this week by EOH says while there have been improvements in financial performance in recent years, the legacy of debt is the next piece of the turnaround strategy to be addressed.

Financial results for the year to July 2022 show interest-bearing liabilities of R1.43 billion, with finance costs swallowing R216 million (2021: R277 million), contributing to a loss from continuing operations of R160 million (2021: loss of R307 million).

When Van Coller took over as CEO in 2018, the group’s debt was about R4 billion.

“With the turnaround of EOH’s compliance, governance and risk management largely complete, and in the context of significant improvement in EOH’s financial performance, EOH’s board of directors considers it appropriate to proceed with the capital raise and position the group’s capital structure for future growth,” the statement reads.

The proceeds of the rights issue will reduce the current interest burden by about R100 million a year, thereby freeing up cash to invest in new markets and products, while bolstering its existing products.

It will also give the group financial headroom to avoid forced disposals of company assets to generate cash. Last year, Van Coller reported that the company had sold 80 businesses in the previous three years to pay down debt.

Another benefit of the rights issue is that it should remove the “distressed” label hanging over EOH and enable it to attract and retain talent and bring in new clients and projects.

A subsidiary of Lebashe Investment Group, EOH’s BEE partner, will take up R100 million of the new shares by way of a specific share issue. The full details of the issue will be published later this month.

Lebashe, Mianzo Asset Management, Anchor Capital and Biggles Trust, which between them own about 30% of EOH’s ordinary shares, have committed to follow their rights in full. The underwriters are Aeon Investment Management, Anchor Capital and Visio Capital Management.

In addition to the rights issue, EOH announced a restructuring of its remaining debt, which gives it a sustainable capital structure and the ability to focus on growth.

In a separate trading update, EOH says while the group historically performs better in the second half rather than the first half of the year, this was not the case in 2022, mainly due to challenges faced in trading divisions Nextec’s Infrastructure Solutions, iOCO’s Software Reseller and Enterprise Applications.

Also weighing down on performance were once-off items, including provisions for Special Investigating Unit (SIU) settlements, goodwill impairments, and the loss on sale of assets and financial impairments related to the lease receivable book, which all primarily arose in H2.

Last year EOH signed a settlement agreement with the SIU and the Department of Water and Sanitation to pay back R192 million it irregularly received between 2012 and 2017.

With many of these problems now out of the way, EOH says it is “operationally well positioned to produce improved results for the full 2023 financial year”.