BID TO REVIVE CONFIDENCE
Return of Bohbot: EOH share regains lost ground
EOH’s share price leapt 12.8% on Wednesday, paring back earlier losses, after the software and technology company announced that founder and former CEO Asher Bohbot would be returning in a permanent executive position "to focus on strategy and stakeholder management".
This was probably a move to "shore up confidence", said Keith McLachlan, a fund manager at AlphaWealth. "EOH’s acquisitive business model needs its share price to rise," he said.
Bohbot, who left EOH unexpectedly at the end of June after 20 years at the helm, returns at a time when the company is under considerable scrutiny. He was "persuaded" to return by current CEO Zunaid Mayet, said a company representative, suggesting that the two had been in discussions for some time.
Forced selling by EOH directors and shareholders, as well as allegations against one of its now former subsidiaries, torpedoed the share price, which fell 35% on December 7. The stock has lost 66.35% of its value over the past 12 months.
Two directors leveraged positions on the share and were faced with margin calls on the weaker price. They had to offload as much as R175m worth of stock just to meet the margin calls from lenders, which were probably no longer satisfied
with the share’s value as collateral on loans.
This drew severe criticism from analysts, who said it put the share price at risk and distracted directors from their jobs.
An investigation by the Independent Police Investigative Directorate into at least one of EOH’s now former businesses, Forensic Data Analysts (FDA), and its director Keith Keating placed pressure on the share.
FDA is implicated in procurement irregularities involving the South African Information Technology Agency and the South African Police Service.
EOH last week announced the sale of FDA and Keating’s other firms, Grid Control Technologies (GCT) and Investigative Software Solutions (ISS), back to their "original shareholders".
These businesses were bought in November 2015, when Bohbot was still at the helm.
"There is never upside to unravelling a deal. Effecting claims against former subsidiaries is a tedious process, which could in the worst case include legal action," said David Shapiro, deputy chairman at Sasfin Securities. The recovery in the share price indicated shareholders welcomed Bohbot’s return, he said.
The purchase of FDA, GCT and ISS was 51% funded by the issue of shares, which at the time were trading at about R150. EOH funded its acquisition spree of the past two decades largely through issuing shares as payment for the companies it buys.
Entrepreneurs who had sold their businesses to EOH in exchange for shares and who were now free to sell these shares were doing so, given the share price decline over the past year, McLachlan said.
"The risk of an overhang in the shares has been building since EOH listed in 1998 and started acquiring businesses by way of share issuances."
The information technology market was highly fragmented, so there remained opportunity for bolt-on acquisitions, said Chantal Marx, head of research at FNB Securities. However, EOH’s cheaper paper made it more difficult to make earnings-accretive acquisitions and the company would need to focus on organic growth, she said.
This was likely to lead to a slight decline in earnings.
Bohbot, who holds 3.5%-4% of EOH, said last week he had not sold shares in "many years".