EOH will pay the Department of Water and Sanitation R191 million – 28% of its current market cap – in compensation for irregularities related to IT contracts.
In August last year, the Special Investigating Unit (SIU) started investigating four IT contracts to the value of R474 million awarded to EOH by the Department of Water and Sanitation (DWS).
The SIU said the contracts linked to corruption and maladministration were awarded by the DWS to EOH between 2012 and 2017.
Apart from potentially uncovering corruption and maladministration at the department, the probe also served to recover financial losses suffered by the state.
The investigation covered transactions linked to EOH that took place between 1 January 2012 and 30 July 2021.
On Friday, the SIU and EOH announced they had reached an agreement on the compensation that EOH must pay the Department of Water and Sanitation.
EOH will pay R191 million, with the terms below.
- An initial upfront payment of R65 million related to duplicated software licenses which will be refunded.
- The remainder of the amount will be paid over 36 months commencing on 1 January 2023.
EOH said in a press statement it was set to pay R177 million. However, this amount did not include the interest charged over the 3-year repayment period.
SIU spokesperson Kaizer Kganyago said the settlement does not absolve EOH of paying further amounts that may be uncovered during the ongoing investigation.
“The agreement is not an exoneration of any person from being held criminally liable for whatever criminal conduct that may be uncovered,” he said.
EOH said it has provided for this settlement in its financial accounts, and it will have no impact on the Company’s income statement.
“The EOH board and leadership express their gratitude to the SIU and DWS for working with EOH to reach a settlement agreement,” EOH CEO Stephen van Coller said.
EOH share price decline
EOH released its financial results for the year ended 31 July 2022 on 27 October, which revealed revenue declined from R6.5 billion to R6.0 billion.
EOH’s loss for the year improved from R280 million in 2021 to R18 million in 2022. It equated to a 91% improvement in total loss per share to 15 cents for 2022 compared to 166 cents for 2021.
A big focus for Van Coller was cutting debt from R2 billion at the end of January 2022 to R1.3 billion at the end of the financial year.
EOH sold numerous non-core and non-performing businesses and used to money to reduce its debt and return to profitability.
When assets are disposed of to cover debt, companies can face liquidity issues because large and illiquid assets are often sold at a discount to their book value.
EOH’s asset base reduced much faster than its liabilities which means It is on the verge of technical insolvency.
EOH now plans to raise up to R600 million through a R500 million rights issue and an additional R100 million BBBEE deal.
The proceeds will be used to settle most of a bridge facility, and EOH believes it will leave it with a sustainable capital structure.
EOH’s challenging financial position and uncertainty around its rights issue sent the share price plummeting 14% since it released its latest results.
The lower share price makes it more difficult for EOH to raise the necessary capital through a rights issue, which can create a downward spiral.