EOH gets the nod for Seacom deal

‘At a group level this also enables us to pursue our fit-for-purpose capital structure’: group executive Marius de la Rey.

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NZINGA QUNTA: The Competition Commission has approved of a deal by EOH to divest of its Network Solutions [NS] and Hymax businesses to Seacom. Marius de la Rey, EOH group executive of services, joins me live. A very good evening to you, Marius. Thanks so much for your time on the SAfm Market Update with Moneyweb. Just give us some context into the sale, and also how it fits in with the strategy that EOH embarked on over the last two years.

MARIUS DE LA REY: Good evening, Nzinga, and good evening to your listeners. Thanks very much for the opportunity to talk about a transaction that we’ve been working on for some time. We’ve been, over the last two years, looking to secure a strategic partnership with somebody that could help us with our NS and Hymax businesses from a capital perspective. I think our debt position has been well articulated in the market and this necessitated that we find a business that could assist us with our strategy – which is being asset-light and IP-strong [intellectual property].

Read: EOH to sell Hymax business to Seacom in R144m deal

I think Seacom is a company that has been in an internet connectivity business for some time, a leading ICT brand, and it’s been a supplier for African enterprises for a considerable period of time. They expressed an interest in participating in the enterprise market themselves, where our EOH NS business and Hymax both were very strong. So it was important to us that we could partner with somebody whose vision aligned with what the strengths of the NS and Hymax businesses were.

You asked about the strategy over the last two years. For us what’s been important is reducing our debt. So the bulk of the proceeds of this transaction will go to reduce the debt net of costs, obviously recurring the transaction. It is a complex transaction – it has taken us some time to choose a partner, and we’re quite excited about having CompCom approval. The staff and customer contracts are an integral part of this transaction.

NZINGA QUNTA: Okay. So Marius, what’s Seacom getting, for how much, and when?

MARIUS DE LA REY: Seacom are buying the business as a going concern, and therefore they’re acquiring the people, the assets and the contracts. I think the ‘when’ is a little complicated. The transaction will take effect on the first day of the month immediately following the month within which our conditions precedent are fulfilled. This process is estimated probably to be roughly at the end of August, August 31.

One of those conditions precedent, which you’re talking about now, was this CompCom [issue], which is due. And so on the effective day, the people from [inaudible] are going to get the entire share capital of Hymax as one indivisible transaction. I think what’s important just for me to explain, if I may, is that it’s a two-tiered inter-conditional agreement whereby we first sell the contents of the business to an entity called Hymax and then the sale of that entire share capital of Hymax goes across to Seacom.

So how much are they getting and what are they paying for? If we have a look at July 31, we have normalised Ebitda [earnings before interest, tax, depreciation and amortisation] in this business of around R30 million. So at a multiple of about 4/4.8 times, that gives us a purchase price that they will pay [of] around R144/145 million. The deal is structured whereby we would get an upfront payment on that date of about R115 million, and then 20% of that will be held in retention in an interest-bearing escrow account for 12 months.

NZINGA QUNTA: So how, if in any way, will your existing customers be affected, as well as your staff?

MARIUS DE LA REY: This was absolutely critical. If I talk about the customers first, all the contractual obligations that we have within EOH remain in place, and so they will not be impacted. The customers are also going to be given the opportunity in this process to cede existing contracts to the new legal entity. We are engaging with customers on a regular basis, and so we are not expecting any negative outcome on that. I think what is important is also that a crucial component of this transaction was that the staff team and all their current contracts with us move across through to the Hymax entity, which Seacom will honour. So the staff are not impacted at all.

I think the key component for the customers is that we are now partnering them with somebody whose balance sheet allows us to increase the actual offerings that Seacom provides, just as a result of our own EOH limitations that we had because the connectivity business is quite a capital-intensive business. So this transaction has worked really well for our shareholders, our staff we believe, as well as our customers.

NZINGA QUNTA: The Competition Commission approved this deal with no conditions – what did that mean for you as EOH?

MARIUS DE LA REY: While we were looking for a partner to do this transaction, it was important that the market share of the merged entity would not result in anti-competitive behaviour. I think that was our belief and certainly Seacom’s belief. So we at EOH believe, in partnering with Seacom, that enabled our Infrastructure Services business – which has a crucial connectivity value proposition – to be delivered without having the commensurate capital drain that comes with having a connectivity business which requires big infrastructure investment.

So for us we are all systems go. We are quite excited about the transaction and what it holds for our staff and for our customers.

Also then to tie back to the first question that you asked me, at a group level this also enables us to pursue our fit-for-purpose capital structure. I think we’ve been quite transparent with the market in making sure, with the debt constraints that we have, as well as the capital structure that we are working on at the moment, that it’s fit-for-purpose.

So, many of the prospects that are going to be unlocked as a result of this transaction for both NS and Hymax customers will be targeted as part of the combined value proposition that Seacom offers us in our infrastructure business. Connectivity will very much be part of our future business – except we believe we’ve partnered with somebody that can enhance the current proposition that we give our customers.

NZINGA QUNTA: All right, Marius, we are about to run out of time, so if I can ask you to answer this in just under a minute: Away from this transaction but looking at EOH as a whole, do you think that you’ve turned a corner – in terms of perception about the company and how it operates – in the last three years?

Read:

MARIUS DE LA REY: I will be quick. Yes, I’ve been in this business for some time. We are quite confident that the perception around EOH has been a really difficult [issue] for the team that was faced with that. There were blockages created by the legacy corruption challenges.

The actual turnaround on the perception is largely testament to the fact that our customers have been loyal to us and stuck with us by and large through this process, as well as our committed staff, under which really difficult circumstances were endured.

So we certainly believe that together with our half-year results that showed that we were kind of back in the black, from a perception perspective we’re on the right track and hugely grateful to our customers and our staff for those efforts.

Read:

NZINGA QUNTA: Marius de la Rey, group executive of services at EOH, was speaking to us about the Competition Commission approving that deal with them and Seacom, and also obviously their perception issues around EOH.

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