EOH has announced the disposal of four businesses to a single purchaser. This is part of EOH’s strategy to dispose of certain IP companies in an attempt to fix the group’s balance sheet.
The assets in question are Hoonar Tekwurks Consulting, Managed Integrity Evaluation, Xpert Decisions Systems and Zenaptix, collectively referred to by EOH as “Information Services” and so I’ll stick to that term as well.
The Information Services businesses provide credit checks, background screening and big data, analytics and technology services in South Africa. Each of the four underlying companies has a different speciality within that broader framework.
The purchaser is an entity called Bachique 842 Proprietary Limited. That sounds like a lipstick colour and doesn’t tell you much in isolation. The important additional information is that the company is a wholly-owned subsidiary of LR Africa Holdings Limited, advised by Lightrock.
Among others, Lightrock is backed by the Princely House of Liechtenstein and its portfolio includes more than 60 high-growth companies. Lightrock has 70 professionals based in 5 offices across Europe, Latin America, India and Africa. EOH notes that it sees Lightrock as the right partner for the Information Services businesses going forward and it does seem like there might be an exciting future ahead for those management teams.
The deal has been priced based on an enterprise value of R445 million. The use of enterprise value is the most common technique in these types of deals, as it allows for the assets to be valued without any distortions from debt or excess cash on the balance sheet. Adjustments are then made for the balance sheet to bridge the gap between enterprise value and what the seller actually receives.
In terms of cash to be received by EOH, the base purchase price is R417 million, adjusted for final net debt and working capital benchmarks among others. The proceeds (net of the adjustments and transaction costs) will be used by EOH to reduce debt.
As at 31 July 2021, Information Services had a net asset value of R344 million and a tangible net asset value (i.e. excluding goodwill and other intangible assets) of R135.6 million.
EBITDA for the year ended July 2021 was R138.4 million. Excluding a once-off non-cash gain, EBITDA was R88 million. This was the most likely number used in arriving at the enterprise value of R445 million, so that’s an EV/EBITDA multiple of just over 5x.
The profit after tax for the year ended July 2021 was R79.1 million. Adjusting for the non-cash item mentioned above as well as other major non-cash items results in a “cash” profit after tax of R37.9 million.
There are several conditions precedent, ranging from South African Reserve Bank approval through to consent by the lenders to EOH. Importantly, EOH shareholders also need to approve the transaction as this is a Category 1 deal under JSE Listings Requirements.
EOH needs to achieve more than 50% support from shareholders and will be releasing a circular “in due course” with all the information needed by shareholders to make a decision. It should make for very interesting reading.
