EOH’s disposal of LSD – The numbers of the deal

EOH recently announced that it was disposing of its stakes in two businesses – CSS and LSD.

In the case of CSS, EOH’s 30% stake in CCS will be sold to RIB Limited – which purchased the preceding 70% from EOH subsidiary EOH Mthombo in July 2019.

The LSD deal was different, however.

EOH Mthombo entered into a settlement agreement with the initial sellers of LSD, which saw it transfer all of its shares in LSD to the initial sellers.

This transfer resulted in the “full and final settlement” of EOH’s outstanding obligations, estimated at R96 million.

“The settlement agreement amicably cancels the initial acquisition agreement and relieves EOH of its obligations in this regard,” said EOH at the time.

EOH said the two transactions were concluded to reduce debt and improve liquidity at the company.

“Both transactions will strengthen the group’s balance sheet in line with EOH’s strategic intent,” it said.

EOH acquires and transfers LSD

EOH acquired LSD Information Technology Proprietary Limited – which specialises in open source software – through EOH Mthombo in December 2017.

In EOH’s consolidated results for the year ended 31 July 2018, it stated it had acquired a 100% interest in LSD for a consideration of R241 million.

This consisted of R105 million in cash and R136 million in shares.

The results further detailed the breakdown of this payment:

  • Cash paid – R37.5 million
  • Shares issued – R45.1 million
  • Cash to be paid – R68 million
  • Shares to be issued – R90.3 million

The results therefore implied that while cash and share payments had been issued to the owners of LSD, there were balances still to be paid as of 31 July 2018.

Following EOH stating in April 2020 that it had transferred all of its shares in LSD to the initial sellers, settling its estimated outstanding obligations of R96 million, this raised questions as to what EOH has paid in total for the company.

MyBroadband sent questions to EOH on the subject, and the company stated that the upfront payment to LSD’s sellers was R37.5 million in cash and 564,228 shares.

This was around a third of the cash and share consideration agreed, said EOH.

“The current value of the shares issued is around R1.5 million. There has been no further payment in terms of the subsequent tranches, other than the obligation being written off,” said EOH.

“EOH will have received R30 million in dividends before the transaction closes and is not permitted in terms of the JSE rules to take back the shares issued. The amounts still due were significantly delayed requiring an interest consideration.”

EOH under financial pressure

The CSS and LSD transactions come at a time when EOH is under financial pressure.

Due to a combination of factors, notably the impact of the COVID-19 pandemic on South Africa, EOH CEO Stephen Van Coller unveiled a list of stringent measures to dramatically cut costs and manage liquidity at the company.

He said their key focus was to manage the business in an environment where they can expect a substantial drop in revenue.

The wide range of initiatives to reduce costs include negotiating rent holidays and a critical review of non-performing or loss-making businesses and projects.

A review of all fixed-term and consultant contracts across the group to assess whether these skills are required was also taking place.

Now read: EOH CEO and executives take 25% salary cut

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EOH’s disposal of LSD – The numbers of the deal