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EOH HOLDINGS LIMITED - Shareholder update: EOH strategy, strategic partnership with Lebashe, including a R3.25 bn growth funding facility

Release Date: 12/03/2018 08:37
Code(s): EOH
 
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Shareholder update: EOH strategy, strategic partnership with Lebashe, including a R3.25 bn growth funding facility

EOH HOLDINGS LIMITED
Incorporated in the Republic of South Africa
(Registration number 1998/014669/06)
Share code: EOH ISIN: ZAE000071072
(“EOH” or the “Company”)


SHAREHOLDER UPDATE: EOH STRATEGY, STRATEGIC PARTNERSHIP WITH LEBASHE,
INCLUDING A R3.25 BILLION GROWTH FUNDING FACILITY, BLACK ECONOMIC
EMPOWERMENT TRANSACTION AND CAUTIONARY ANNOUNCEMENT


1.    EOH STRATEGY

      EOH has grown significantly over the past 20 years, now employing approximately 13 000 people
      and servicing over 5 000 large customers. EOH has evolved into the largest multidisciplinary
      technology services group in Africa comprising diversified businesses across a large number of
      sectors and markets.

      Following a strategic review of its business, EOH has decided that for the long-term benefit of all
      stakeholders it shall form two independent businesses within EOH, each of which will have its
      own:
          -    Brand and identity.
          -    Growth strategy.
          -    Go to market approach.
          -    Business model.
          -    Culture.

      The two independent businesses will be branded as follows:

          -    one will continue to trade under the EOH brand; and
          -    the second business (“NewCo”) shall create and launch its own brand and identity within
               the following two months.

      This will achieve the following:

          -   Better managed business diversity.
          -   Full realisation of each business’ potential.
          -   Clarity of brand identity.
          -   The appropriate business model for each business.
          -   Simplified business processes.
          -   Reduced complexity.
          -   Reduced management span of control.
          -   Greater oversight and stronger governance.
          -   Increased agility.
          -   Reversal of diseconomies of scale.
          -   Unlocking of shareholder value.

  The key characteristics of the business continuing under the EOH brand are:

          -   End-to-end information communication technology (ICT) offering.
          -   Integrated go to market strategy.
          -   Cross-industry intellectual property (“IP”).
          -   Growth is mainly organic.
          -   Cross-selling opportunity with existing customers.
          -   Highly proficient system integration as a market differentiator.
          -   New generation digital technologies driving growth.

  Approximately 55% of EOH’s group revenue is currently generated by this business.

  The key characteristics of the business to trade under the “NewCo” brand are:

          -   High degree of specialisation in each of the businesses.
          -   Deep levels of expertise.
          -   Domain specific IP.
          -   Growth driven equally by acquisitions and organically.
          -   Business units operate relatively autonomously.
          -   Differentiated by vertical specific offering.
          -   Operates in high growth industries.

   Approximately 45% of EOH’s group revenue is currently generated by NewCo’s business.

   This strategy will form the backbone of a new phase in EOH’s growth and development.


2. LONG-TERM STRATEGIC PARNERSHIP WITH LEBASHE, R3.25 BILLION FUNDING
  FACILITY AND BLACK ECONOMIC EMPOWERMENT (“BEE”) TRANSACTION


   2.1.       Introduction to Lebashe

   EOH and Lebashe Investment Group Proprietary Limited, acting through its Lebashe Financial
   Services division, (“Lebashe”) (collectively, the “Parties”) have identified significant synergistic
   mutual growth opportunities and, in order to access these opportunities, resolved to form a long-
   term strategic partnership.


   Lebashe is an established, 100% black-owned investment holding company with a variety of
   interests in the South African financial and technology sectors holding interests in, inter alia,
   Capitec Bank Holdings Limited, Aluwani Capital Partners Proprietary Limited, 4 Africa Exchange
     Proprietary Limited as well as various other entities operating within its chosen sectors.
     Furthermore, Lebashe shares common management and ownership with entities holding
     significant investments in a variety of African infrastructure, energy and technology assets.


     The strategic alignment of Lebashe and EOH’s interests through the Transaction presents an
     opportunity for the Parties to further cooperate and pursue growth opportunities and synergies
     between the business interests of the Parties, which shall be accelerated through an upfront
     equity capital injection by Lebashe into EOH and further supported by the provision of a new
     funding facility by Lebashe to EOH, as set out below.

     2.2.          Agreement with Lebashe

     EOH shareholders (“Shareholders”) are hereby informed that EOH has entered into a framework
     agreement with Lebashe pursuant to which the Parties have agreed, subject to the fulfilment of
     certain conditions precedent, to conclude a transaction in terms of which EOH:

        -   will establish a long-term strategic partnership with Lebashe;
        -   Lebashe will subscribe for new ordinary EOH shares (“EOH Shares”) for R250 million;
            and
        -   EOH will have access to a funding facility for growth in an amount of up to an additional
            R3 billion, whilst significantly enhancing EOH’s BEE ownership credentials over a period
            of ten years, at a minimum of 20.3% for five years (collectively, the “Transaction”).


3.   SALIENT TERMS OF THE TRANSACTION

     The Transaction comprises, inter alia:

     -  the issue, subject to such further terms and conditions customary to a transaction of this
        nature, of new EOH Shares at a 10% discount to the volume weighted average price of an
        EOH Share on the exchange operated by the JSE Limited (“JSE”) for the 30 trading days
        immediately        preceding    the   issue   of   the   EOH    Shares       (“30   Day   VWAP”),
        (“Initial Subscription”);

     -  the provision by Lebashe of a R3 billion funding facility to EOH (“Lebashe Facility”) over a
        period of five years from the date of the Initial Subscription (“Transaction Term”) which
        EOH can access through the issue of new unsecured domestic medium term notes
        (“EOH Notes”) to Lebashe; and

     -  the creation and issue of 40 million new unlisted redeemable A shares in EOH (“A Shares”)
        to Lebashe (“A Share Issue”) to be held by Lebashe as EOH’s BEE partner throughout the
        Transaction Term, thereby further increasing EOH’s BEE ownership credentials over a
        period of ten years, with a minimum of 20.3% for the first five years.

    The table below presents, for illustrative purposes, the potential Shareholder dilution that may
    result from the A Share Issue:


     Future EOH                        Potential Shareholder            Implied compound annual growth
     share price (Note 1)                  dilution (Note 2)              rate of EOH share price over
                                                                             Transaction Term (Note 3)

     R112.00                                               -                                     10.9%

     R125.00                                           2.65%                                     13.4%

     R150.00                                           6.23%                                     17.6%


Notes:
1.     Illustrative future EOH 30 Day VWAP to be utilised for purposes of the A Share Formula (as set out
       in more detail in paragraph 3.2 below).
2.     Calculated assuming no dividends paid or shares issued by EOH during the Transaction Term.
3.     Calculated using the future EOH share price (set out in column 1) and the EOH 30 Day VWAP on
       Friday, 9 March 2018 (i.e. R66.75).


Implementation of the Initial Subscription, the A Share Issue and the Lebashe Facility will be
inter-conditional and subject to certain suspensive conditions, including Shareholder approval.

3.1.     Initial Subscription

Upon implementation of the Transaction, Lebashe has agreed to subscribe for new EOH
Shares at a subscription price equal to a 10% discount to the 30 Day VWAP for a total cash
consideration of R250 million (“Initial Subscription Amount”).

In order to secure the BEE ownership credentials which shall accrue to EOH pursuant to the
Initial Subscription, for the duration of the Transaction Term Lebashe will undertake not to
dispose of the EOH Shares received pursuant to the Initial Subscription.

Should the Transaction not be implemented for any reason not attributable to Lebashe, the
origination and structuring fee associated with the procurement of the Initial Subscription
Amount and the Lebashe Facility, calculated as 0.5% of the aggregate value of these amounts
shall be payable by EOH to Lebashe.

3.2.     A Share Issue

EOH will create new unlisted A Shares for purposes of the Transaction for issue to Lebashe.
During the Transaction Term, each A Share shall rank pari passu with an EOH Share in respect
of voting rights but each A Share will only receive cash dividends in an amount equal in value
to 15% of cash dividends paid in respect of an EOH Share (“Reduced Dividend Right”).
Upon implementation of the A Share Issue, 40 million A Shares will be issued to Lebashe for a
nominal subscription price. As a result of the A Share Issue, BEE ownership in EOH will further
increase by approximately 20.3%. In order to secure this increased BEE ownership in EOH, for
the duration of the Transaction Term Lebashe will not be entitled to dispose of nor encumber
the A Shares acquired pursuant to the A Share Issue.

At the end of the Transaction Term, EOH will, pursuant to an A Share capitalisation issue, issue
such number of EOH Shares Lebashe as determined in accordance with a formula
(“A Share Formula”).

The A Share Formula determines the number of EOH Shares to be issued to the holders of A
Shares as:

 -  the amount by which the 30 Day VWAP of an EOH Share at the end of the Transaction
    Term (“Calculation Date”) exceeds an amount of R112.00 per EOH Share; plus
 -  the aggregate value of the dividends not paid in respect of the A Shares pursuant to the
    Reduced Dividend Right over the Transaction Term (“Sacrificed Dividends”); collectively
    divided by
 -  the 30 Day VWAP of an EOH Share as at the Calculation Date.

The A Share Formula is set out below:

                                           [B x (C + D)]
                                 A    =
                                                 E
where:

    A   =   Number of EOH Shares to be issued in respect of the A Shares.
    B   =   Number of A Shares in issue as at the Calculation Date.
    C   =   30 Day VWAP of an EOH Share on the Calculation Date less R112.00,
            subject to a minimum of zero.
    D   =   The amount of Sacrificed Dividends over the Transaction Term, being 85%
            of all dividends paid in respect of EOH Shares during Transaction Term.
    E   =   30 Day VWAP of an EOH Share on the Calculation Date.



3.3.     Lebashe Facility and DMTN Programme

EOH will establish a R5 billion domestic medium term note programme (“DMTN Programme”)
pursuant to which EOH Notes shall be issued by EOH and listed on the interest rate market of
the JSE. Pursuant to the Lebashe Facility, Lebashe shall undertake to subscribe, at EOH’s
request, for EOH Notes up to an aggregate nominal value of R3 billion, subject to the terms
and conditions of the Lebashe Facility which would include, inter alia, compliance by EOH with
financial covenants and other terms customary to a facility of this nature.


4.    FURTHER INFORMATION

      Further details regarding the Transaction, the Transaction circular and the related salient dates
      and times pertaining to the Transaction will be published on SENS in due course.


5.    CAUTIONARY ANNOUNCEMENT

      EOH’s board of directors is in the process of preparing the pro forma financial effects of the
      Transaction. Accordingly, Shareholders are advised to exercise caution when dealing in the
      Company’s securities until a further announcement in this regard is made.



Johannesburg
12 March 2018


Corporate Advisor and Transaction Sponsor to EOH on the Transaction
One Capital


Attorneys to EOH on the Transaction
Cliffe Dekker Hofmeyr Inc.

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