EOH - Africa’s Largest Technology Service Provider

The condensed consolidated financial statements have been prepared in accordance with the framework concepts and the measurement and recognition requirements of International Financial Reporting Standards (‘IFRS’) and its interpretations adopted by the International Accounting Standards Board (‘IASB’) and comply with the Financial Reporting Pronouncements as issued by the Financial Reporting Standards Council, and contain at a minimum the information required by IAS 34: Interim Financial Reporting, the requirements of the Companies Act No 71 of 2008 of South Africa and the JSE Limited Listings Requirements.

The condensed consolidated financial statements have been prepared on the historical cost basis, except for certain financial instruments that are measured at fair value through profit or loss at the end of each reporting period.

The condensed consolidated financial statements are presented in South African Rand, which is the Group’s presentation currency, rounded to the nearest thousand except for when otherwise indicated. The going concern basis has been used in preparing the condensed consolidated financial statements as the directors have a reasonable expectation that the Group will continue as a going concern for the foreseeable future.

The accounting policies and methods of computation applied in the condensed consolidated financial statements are consistent with those applied in the previous years, except as set out below.

The comparative financial information in the condensed consolidated financial statements has been restated based on information available at 31 July 2018. Refer to note 4 and note 6 for further information.

The Group has applied the following standards and amendments for the first time to their annual reporting period commencing 1 August 2018:

4.1 IFRS 9 – Financial Instruments

IFRS 9 – Financial Instruments replaces IAS 39 – Financial Instruments: Recognition and Measurement for Annual Periods beginning on or after 1 January 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement; impairment; and hedge accounting.

The Group applied IFRS 9 retrospectively without restating comparatives, with an initial application date of 1 August 2018. Differences arising from the adoption of IFRS 9 have been recognised directly in retained earnings and non-controlling interests.

The effect of adopting IFRS 9 as at 1 August 2018 was, as follows:

* Refer to note 6 – Restatement of financial statements for the impact on the affected assets.

The adoption of IFRS 9 fundamentally changed the Group’s accounting for impairment losses for financial assets by replacing IAS 39’s incurred loss approach with a forward looking expected credit loss approach. IFRS 9 requires the Group to recognise an allowance for expected credit losses for all financial assets not held at fair value through profit or loss and contract assets and finance lease receivables.

The additional impairments recognised with regard to other financial assets; trade and other receivables, contract assets and finance lease receivables resulted in a decrease in retained earnings of R206 million and a decrease in non-controlling interests of R4 million as at 1 August 2018.

4.2 IFRS 15: Revenue from Contracts with Customers

The adoption of IFRS 15 – Revenue from Contracts with Customers did not have a material impact on the Group’s condensed consolidated financial statements. The Group adopted IFRS 15 using the modified retrospective method of adoption with the date of initial application of 1 August 2018.

The following reportable irregularities (‘RIs’) in terms of section 45 of the Auditing Profession Act were raised by the independent auditors during the current financial year:

1. Potentially suspicious transactions amounting to approximately R1,2 billion were entered into by EOH with suppliers, where the transactions may have related to illegitimate transactions, theft or bribery and corruption payments. These transactions appear to be primarily limited to the public sector business and to a limited number of EOH employees. Current EOH management have engaged with external parties to investigate the suspicious transactions.

   The above would indicate that past directors and management failed to act in the best interests of the Company and in the public interest.

2. EOH provided funding in the form of an enterprise development loan to an entity which became an associated party. Previous directors of EOH as well as a director of the associated party failed to disclose the interests in the said contract at the time of becoming an associated party. It was alleged that the proceeds of the loan were passed through the associated party to another entity and thus not utilised for the original purpose of the loan. Management further alleged that the money was utilised for a political event and was initially not intended to be repaid.

   EOH allegedly supplied IT equipment to an entity it was not specifically intended for with the intention of garnering favour with respect to future contracts. The invoice indicated that the equipment was sold to a related entity, though it was intended elsewhere.

   Monies were paid to an entity where the allegations are that this was used as a vehicle to donate funds to a political party.

   A donation was made, assisting in the payment of various expenditures, to an entity responsible for the awarding of tenders, in the same month as the awarding of the tender.

During the current year, management identified a number of transactions that appeared to have been processed incorrectly in both current and prior periods; the impact of these transactions spanned various accounting topics, including revenue recognition, asset capitalisation and subsequent recovery, and timing of recognition of liabilities and other provisions for impairment.

In assessing whether the identified adjustments should be processed as prior period errors or recognised in the current period, management considered whether the facts that gave rise to the adjustments existed in prior years, or whether those events only arose due to information that came to light in the current year. The 2018 condensed consolidated financial statements and the condensed consolidated statement of financial position as at 1 August 2017 have been restated to correct the prior period errors. As a result of the extent and complexity of the restatements required to correct these errors, management have grouped the restatements according to the nature of these errors.

A brief explanation of each group of errors is provided below, following which an analysis is included of the financial impact on the affected financial statement line items:

Revenue

Under IAS 18 Revenue, revenue could only be recognised once it was probable that the economic benefits associated with the transaction would flow to the seller and the amount of revenue could be measured reliably, among other requirements. A number of revenue transactions had been recognised in prior years, for which it was not probable that benefits would flow to the Group due to a lack of valid and enforceable rights to the benefits, as valid contracts or other binding agreements were not in place at the time. These transactions primarily related to arrangements in the public sector. The requirements to recognise revenue for these transactions under IAS 18 were not met in prior years, based on the facts and circumstances that existed in prior years. The Group has therefore corrected for these errors in the prior year through the reversal of revenue, trade receivables and work-in-progress (unbilled revenue) balances.

In addition, a number of revenue transactions, for which the Group would have been considered to be an agent using information available in prior years had been incorrectly recognised on a gross basis in prior years due to the lack of an assessment of the Group’s agent/principal status in prior periods. This incorrect application of the accounting principles in the prior year has also been adjusted as a prior period error through the reversal of revenue and cost of sales and only recognising the margin as revenue.

Internally generated intangible assets

IAS 38 Intangible Assets distinguishes between research and development costs with regards to internally generated intangible assets. Costs related to research activities are expensed and costs related to development activities are capitalised if they meet certain specified criteria. Further, if an entity cannot distinguish the research phase from the development phase of an internal project, the entity treats the expenditure on that project as if it were incurred in the research phase only. The Group had capitalised certain costs incurred on internally generated intangible assets, for which the criteria for capitalisation as development costs had not been demonstrated in prior years. For the majority of these intangible assets, business plans had not been prepared and the ability of the assets to generate future economic benefits had not been demonstrated; the specified criteria set out in IAS 38 were therefore not met at the time of initial recognition of the intangible assets based on factors that existed at that time. The costs incurred should therefore never have been capitalised but, instead, recognised as research costs as incurred. Correction of this error has resulted in the reversal of capitalised intangible assets together with the reversal of any related amortisation of the capitalised intangible assets and an increase in research costs expensed.

Inventory licences

IAS 2 Inventories requires that for items to be capitalised as inventory, it should first meet the definition of an asset. The conceptual framework defines an asset as a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

Costs were incurred and capitalised as inventory in prior years even though it was doubtful, at the time of incurring the costs, that future economic benefits would flow to the Group. This relates largely to acquired licences that were assigned to specified potential customers which, once assigned, could only be sold to that potential customer, but for which the Group had no commitment from the potential customer that it would acquire the licence. Management believe that the costs incurred to acquire these licences should therefore have been recognised as an expense when incurred, taking into account the information that existed at the time of initial recognition. Accordingly, correction of this error has resulted in the reversal of inventory and an increase in expenses.

Provision for impairment on financial assets

Under IAS 39 Financial Instruments: Recognition and Measurement principles, a financial asset carried at amortised cost is impaired, and impairment losses recognised if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the financial asset. An entity is therefore required to assess at each reporting date whether there is any objective evidence of impairment. If such evidence exists, the entity is required to perform a detailed impairment calculation to determine whether an impairment loss should be recognised. Management identified certain financial assets carried at amortised cost, for which impairment indicators existed in prior years, including defaults on scheduled payments. The Group did not perform an adequate impairment assessment for these financial assets in prior years, despite the existence of these impairment indicators. Had an assessment been performed using information available at the time, additional impairment provisions would have been recognised. Correction of these errors has resulted in an increase in the provision for impairment, as well as an increase in the impairment expense for the prior period.

In the prior year, GCT had defaulted on loan repayments due to the Group, resulting in the existence of an indicator of impairment under IAS 39 at 31 July 2018. The Group did not identify the impairment indicator for GCT as a counterparty at that time, and therefore did not perform an adequate impairment test. An assessment of impairment, taking into account the facts that existed at 31 July 2018, resulted in the need to recognise an impairment provision on the GCT loan as a prior period error, with subsequent deterioration in 2019 being recognised in the current year.

Unrecorded liabilities/recoverability of assets

The Group has identified certain tax liabilities pertaining to prior periods that should have been recognised in prior years, but for which there was no accounting at the time. Such tax liabilities include liabilities which were assessed as a result of the ENS investigations. These tax liabilities arose from obligations that existed in prior years and not from reassessments of the Group’s tax liability position, and should have been recognised in prior periods based on information that existed at that time.

Additionally, management has identified cases in which revenue had been recognised for work performed in prior periods, without proper accrual of related costs incurred.

Recognition of these liabilities and accruals has been accounted for as a prior period error, resulting in increases in tax liabilities and trade and other payables, as well as increases in the expenses in the periods to which it relates.

A number of impairment indicators for the Group’s investment in TTCS, trade receivables and loan balances existed in prior years – these included:

• Default by TTCS, prior to 31 July 2018, on the repayment of debtor and loan balances due to the Group;
• Significant deterioration in key ratios of TTCS in the prior periods; and
• Ongoing and persistent foreign currency shortages in Zimbabwe.

Although impairment indicators existed in prior periods, the Group did not previously perform adequate impairment tests related to TTCS, which would have resulted in impairment provisions being recognised. The loan and debtor balance from TTCS, along with the Group’s investment in TTCS have been adjusted as prior period errors, with subsequent deterioration in 2019 being recognised in the current year.

The identified errors have been corrected by retrospective restatement in the period to which it relates. In most cases, it is impracticable to distinguish the period-specific effect of the error, due to changes in management and the lack of availability of information, in which case the error was corrected in the comparative 2018 condensed consolidated financial statements. The portion of the tax liabilities related to the ENS investigations pertaining to financial periods ended before 1 August 2017 have been adjusted for against the opening balances of liabilities and equity as at 1 August 2017.

The errors have been corrected by restating each of the affected financial statement line items for the prior periods as follows:

Statement of financial position (extract) as at 1 August 2017

Statement of financial position (extract) as at 31 July 2018

Statement of profit or loss and other comprehensive income (extract) for the year ended 31 July 2018

The restatement adjustments are all non-cash adjustments and therefore do not impact cash generated before working capital changes or any other line items on the consolidated statement of cash flows.

A number of economic, operational and negative events during the year ended 31 July 2019 had a significant negative impact on EOH’s market capitalisation and certain underlying businesses. The Group has also gone through a review of its strategy which impacted CGU allocations. This, combined with the sale and discontinuation of certain non-core business activities, has resulted in a material impact on the carrying value of goodwill. The Group performed a review of goodwill for impairment, which highlighted impairments of R1 855 million (R613 million in the iOCO segment and R1 242 million in the NEXTEC segment).

iOCO

The impairments to goodwill in iOCO relate mainly to EOH’s public sector-focused ERP businesses. Goodwill amounting to R198 million across a number of CGUs was impaired due to continued project complexities, slow debtor recoveries and the impact of no further large ERP projects on the continuing outsourcing business.

A further R116 million in impairments in this division were driven by lost or delayed contracts and projects as a result of the reputational damage sustained by EOH.

Goodwill relating to iOCO International CGUs was impaired by R114 million driven mainly by weaker cash conversion and project delivery difficulties in the Middle East and European entities.

The balance of the iOCO impairments relates to a number of CGUs which have been negatively impacted by challenging market conditions.

NEXTEC

The industrial technologies division of NEXTEC sustained a number of impairments as detailed below:

• The rail transport technologies’ CGU was impaired by R146 million, due to continuing difficulties in completing active contracts and ongoing delays in starting new contracts which have driven continued underperformance against budgets.
• Despite project awards and sign-off for various REIPP projects in the energy sector (electricity generation), there have been continued delays in project launch and completion of transmission and distribution projects both in South Africa and Mozambique, resulting in an impairment of R196 million in Energy-related CGUs.
• CGUs providing water infrastructure solutions continue to be impacted by project kick-off delays on projects in hand, as well as new project awards as a result of public sector funding and administrative issues, which have resulted in continued underperformance to budgets and impairments of R131 million.
• Margins within the digital infrastructure businesses have also been negatively impacted by original equipment manufacturers opting to sell directly to customers, resulting in a drop in revenue and margin as well as an impairment of R90 million to goodwill.
• Impairments of R55 million relate to certain non-core CGUs that are held for sale.

The business process outsourcing division of NEXTEC sustained a number of impairments as detailed below:

• A number of CGUs which provide employee services, were impacted by the 2018 High Court ruling related to temporary staffing. This resulted in decreased revenue and reduced margins, driving impairments of R117 million.
• Changes in US legislation governing clinical trials resulted in a loss of customers in the outsourced clinical trials business. This has impacted the earnings forecast and profitability levels resulting in an impairment of R95 million.
• Impairments of R67 million relate to certain non-core CGUs that are held for sale.
• Inability to maintain and secure customer contracts contributed to R63 million of the impairment recognised.

The balance of the NEXTEC impairments relate to a number of CGUs impacted by the negative events and challenging South African market conditions, resulting in further impairments.

* Refer to note 6 for further information regarding the restatement of the prior year.

Impairments to intangible assets largely relate to:

• Customer relationships and customer contracts were impaired for R107 million after the profitability of the related relationships and contracts deteriorated below expected levels.
• The remaining impairments relate to other internally generated software in a number of underperforming CGUs in which goodwill impairments have also been recognised of R28 million.

EOH Mthombo sold 70% of its wholly owned subsidiary Construction Computer Software (CCS) for an amount of R444 million to RBI Limited, a subsidiary of German-listed RIB Software SE (RIB) as at 31 July 2019. EOH retains a 30% shareholding in CCS, and will be able to participate in CCS expansion and growth. The change in shareholding is reflected as an addition to equity investments, the entity was formerly recognised as a subsidiary.

Equity accounted investments have been impaired by R268 million

• As part of the Group’s strategy to exit from non-core operations, a number of equity-accounted investments have been classified as held for sale.
• R75 million of the impairments relate to EOH’s investments in Turkey as a result of increased levels of political and macro-economic risk causing delays in project kick-offs and a deterioration in cash recovery rates.
• Margin erosion, deterioration in pipeline and reduced cash conversion rates triggered an impairment of R151 million in EOH’s South American-based ERP utilities investment.

The equity-accounted investments are as follows:

The Group recently refined its operational structure into three distinct reportable segments to allow for leaner and more agile core businesses with separate capital and governance structures. Opportunities are being explored for the sale of certain non-core assets and, as a result, there are a number of businesses that were approved for sale and for which the sale is expected to be completed within 12 months from the reporting date. These businesses are classified as disposal groups held for sale and the assets and liabilities of these disposal groups have been presented as held for sale at 31 July 2019. In addition, Construction Computer Software (CCS) as well as other smaller businesses were disposed of during the period.

The major classes of assets and liabilities of the disposal groups, per reportable segment, classified as held for sale as at 31 July 2019 are as follows:

The discontinued operation (GCT Group) was disposed of during the year ended 31 July 2018. As a result, no assets were held for sale at 31 July 2018.

• invested R750 million in three tranches in EOH ordinary shares based on a 30-day VWAP at a 10% discount for an average share price of R33.59; and
• received 40 million unlisted EOH A shares which will be redeemed in five years on 1 October 2023 through an ordinary share issue. The A shares rank equal to an EOH ordinary share in respect of voting rights and each EOH A share will receive cash dividends in an amount equal to the value of 15% of dividends paid by EOH to ordinary shareholders. The remaining 85% of the dividend value will be accrued and redeemed through the redemption of the A shares. The obligation to Lebashe is treated as an equity transaction as the settlement will be undertaken in ordinary shares and the transaction is therefore within the scope of IFRS 2

The related IFRS 2 share-based payment charge of R157 million has been recognised in the statement of profit or loss.

Identification and classification of discontinued operations

There were a number of businesses that were approved for sale at 31 July 2019, and for which the sale is expected to be completed within 12 months from the reporting date, as well as businesses that were already sold during the current and previous reporting periods that have met the requirements to be presented as discontinued operations and have accordingly been presented as such.

Judgement was applied in determining whether a component is a discontinued operation by assessing whether it represents a separate major line of business or geographical area of operations or is part of a single plan to dispose of a separate major line of business or geographical area of operations.

The Group’s intention to dispose of these non-core assets triggered an initial impairment assessment on the underlying assets at 31 July 2019, and the resulting impairment was allocated to the identified disposal groups (refer to note 8: Goodwill).

~ Comparative figures previously reported have been amended to reflect continuing operations prevailing for the year ended 31 July 2019.

Reviewed for the year ended to 31 July 2019

* iOCO discontinued operations include the TTCS Group and other international businesses.

On 31 July 2019, CCS was sold for proceeds of R444 million, resulting in a gain on disposal of R220 million.

The Group acquired 49% of the TTCS Group (‘TTCS’) in 2015 and had since been equity-accounting the investment.

TTCS provides system integration, product delivery, maintenance and support services predominantly to customers in Zimbabwe and growing operations in Zambia, Malawi, Kenya, Uganda, Rwanda, Tanzania, Ghana, Botswana and Nigeria, as well as other project delivery in sub-Saharan Africa.

As at 31 July 2018, the Group had the following balances in relation to TTCS:

Equity-accounted investment – R453 million

Other financial assets (loan) – R87 million

Trade and other receivables – R424 million

During the first half of 2019, an error in consideration of the impact of the impairment indicators on the measurement of TTCS Zimbabwe was re-evaluated. The recoverability of trade receivables and loan balances and the expected cash flows were re-evaluated in terms of IAS 39 and the carrying value of the investment in the TTCS Group was re-evaluated, resulting in prior year impairment provisions of R542 million, which was adjusted for as a prior period error, adjusting the opening balances for 2019. Refer to note 6 for further details on the correction of the prior period error.

Obtaining control

The Group gained control of the TTCS Group of Companies on 17 January 2019 as a result of investigations and a settlement between SAP, the Department of Justice in the United States of America and TTCS, with the Board of directors of TTCS being reconstituted to afford EOH 60% of the voting rights. Judgement was applied in assessing whether there was control and the Group was considered to have power over TTCS, exposure or rights to variable returns from its involvement with TTCS and the ability to use its power over TTCS to effect the Group’s returns from this date onwards. The direct and effective shareholding in each entity remained unchanged.

Obtaining control required the Group to recognise TTCS as a subsidiary and therefore ‘dispose’ of its associate at fair value as part of the acquisition of the subsidiary.

As a result of the deemed disposal of the investment in TTCS as an associate, a loss on disposal of R146 million was recognised. This loss was as a result of the Group’s reliance on the Zimbabwean operations and the recent and continuing disruptions within Zimbabwe, as well as the impact of changes in local currency.

The (loss)/profit for the period from the investment in associate and deemed disposal subsequently is:

* The value of TTCS Group is based on a valuation of the current shareholding and the following key assumptions:

• a four-year forecast for the TTCS Group’s operations;
• a weighted average cost of capital of between 17,0% and 23,6% (depending on the country of operation);
• a terminal growth rate of 2,1%; and
• discounts of 10% to 30% for a lack of marketability and the current illiquid nature of the investments which increased significantly as a result of the recent deterioration in local currency, as recognised through the Old Mutual Implied Rate.

The businesses were valued at approximately R64 million at 31 December 2018. Conservatively, as a result of the continuing uncertainty regarding Zimbabwe and the new currency, management’s expectation was that dividends were not likely to be paid in the medium to long term. Therefore, when calculating goodwill and the loss on disposal, an enterprise value of Rnil has been used.

The subsequent deemed acquisition of TTCS as a subsidiary impacted the Group as follows:

There were no acquisition-related costs during the period included in operating expenses in the statement of profit or loss.

The contribution to the trading results of the TTCS Group have been accounted for from the effective date of the business combination. The accounting of these subsidiaries is based on best estimates and fair values.

Loss of control

A Sale of Shares Agreement (SSA) was entered into between the Group and the previous shareholder, whereby the Group will sell its entire 49% shareholding to the previous shareholder, with the risk and benefit of the 49% shareholding passing with effect from 1 May 2019. From 1 May 2019, the Group no longer has any board representation at TTCS and does not have the ability to appoint any board members. The Group effectively lost control over TTCS on 1 May 2019.

The SSA contained three suspensive conditions for the sale and purchase to be completed and as at 31 July 2019, one of the suspensive conditions, being the relevant exchange control approval from the Reserve Bank of Zimbabwe, was not received. As the sale was not yet concluded at the reporting date, the retained investment was classified as held for sale (refer to note 11).

The Group accounts for the investment retained in TTCS upon loss of control, as an investment in associate under IAS 28.

According to IFRS 10, when a parent loses control of a subsidiary, it must recognise any investment retained in the former subsidiary at its fair value at the date when control is lost. The fair value of the retained investment is Rnil.

The results of TTCS for the current period as well as the prior period are shown as discontinued operations (refer to note 14).

The Group realised an accounting profit on loss of control of R125 million. Loans owing by TTCS to the Group were waived and the Group has a SAP settlement liability of R46 million on behalf of the TTCS Group.

The following table summarises the carrying amount of financial instruments included in other financial assets and other financial liabilities:

Other financial assets

* Refer to note 6 for further information regarding the restatement of the prior year.

Financial assets at fair value through profit or loss

Other financial assets (level 3) relate to non-controlling interests in unlisted businesses and a cell captive. The valuation of the unlisted business is based on a discounted cash flow model which has been adjusted for risk inherent in the investees’ nature of operations and the cell captive is valued based on the net asset value reported by the service provider. At 31 July 2019 the carrying value of the level 3 financial assets, based on the directors’ evaluation, is R28.3 million (31 July 2018: R49.8 million).

Financial liabilities measured at fair value through profit or loss, in terms of the hierarchy, are classified as level 3 as the valuation techniques used are based on unobservable inputs for the liability.

Vendors for acquisition

The balance in respect of vendors for acquisition relates to the contingent consideration where business combinations are subject to profit warranties. The profit warranties allow for a defined adjusted value to the consideration payable in the event that the warranted profit after tax is not achieved, or in the event that it is exceeded, an agreed sharing in the surplus. The fair value of the contingent arrangement is initially estimated by applying the income approach assuming that the relevant profit warrant will be achieved. Subsequent measurement uses the income approach to calculate the present value of the expected settlement payment using the latest approved budgeted results and reasonable growth rates for the remainder of the relevant warranty periods taking into account any specific circumstances.

Profit warrant periods normally extend over a 24-month period.

Upwardly revised performance expectations would result in an increase in the related liability, limited to the terms of the applicable purchase agreement.

Unobservable inputs include budgeted results based on margins and revenue growth rates historically achieved by the various segments. Changing such inputs to reflect reasonably possible alternative assumptions does not significantly change the fair value of the vendors for acquisition liability.

The EOH Group has an established control framework with respect to the measurement of fair values. This includes a valuation team that reports directly to the Group Chief Financial Officer who oversees all significant fair value measurements.

The Group does not have any financial instruments that are subject to offsetting.

All short-term receivables and payables carrying amounts approximate their fair values due to their short-term nature.

There have been no transfers between levels of the fair value hierarchy.

Non-recurring fair value measurements

Disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. The fair values were determined based on sales agreements that are in place for each of the disposal groups that are held for sale. The total of such fair values is R856 million. The discounted cash flow method (DCF) is used to determine their values, when the sales amount from the sale agreements was discounted using the adjusted weighted average cost of capital specific to that cash-generating unit (CGU). These fair values are categorised as level 3, based on inputs used.

Commitments

The Group has issued guarantees and performance bonds from various Group companies as well as through available third-party facilities. At this stage, the Group is not aware of any guarantees or bonds issued which may be exercised by holders. The balance at 31 July 2019 was R358 million (2018: R305 million).

Continued disposal of non-core assets

The Group is considering disposing of certain businesses. To date, six agreements have been reached for the sale of a number of businesses that are classified as held for sale at 31 July 2019 for an estimated total consideration of R18 million.

There have also been two businesses that have been classified as held for sale subsequent to year end.

Various disposal processes are expected to be realised, but have not met the criteria to be recognised as assets held for sale by 31 July 2019.

Lebashe investment

On 11 October 2019, EOH shareholders were advised that Lebashe had formally notified EOH of its intention not to subscribe for the R250 million third tranche of the subscription undertaking. Lebashe took a conscious decision to allow EOH to establish a new independent Board of directors (New Board) without representation from Lebashe until after the conclusion of the ENSafrica investigation and the determination of the impact thereof.

Accordingly, EOH is, at any time after 1 October 2019, at its discretion, entitled to:

(i) require the forfeiture of dividends on 10 000 000 EOH A shares to EOH; and

(ii) redeem 10 000 000 EOH A shares for R1,00.

While the current economic dilution of the 10 000 000 EOH A shares is limited, the EOH A shares each have the same voting rights as an EOH ordinary share and are therefore an important consideration in the deliberations of the New Board. Further announcements will be made as soon as a decision has been made by the New Board.

Notwithstanding the decision taken by Lebashe not to subscribe for the third tranche in accordance with the transaction terms, the investment and strategic relationship with EOH remains important to Lebashe and Lebashe has committed to still providing the last tranche of funding originally committed to as part of the transaction subject to agreeing to mutually acceptable terms and EOH’s shareholder approval, if required. Discussions between Lebashe and the New Board are ongoing with a view to finding a solution that is in the best interests of all capital providers.

Debt reduction plan

We have renegotiated payment terms with our lenders, which will accelerate the deleveraging of our balance sheet in an orderly manner, from sales proceeds. This has resulted in R750 million being classified as short-term liabilities in the financial statements.