EOH M&A Pic

EOH, The Most Prolific M&A Company in the SA ICT Sector

EOH Holdings Limited (EOH) is the most prolific M&A company in the SA ICT sector. Analysis of the revenue streams over the period 2011 to 2016 shows that by FY2016, EOH had earned 63% of its revenues from the cumulative acquisitions it had made over this period. The EOH challenge, however, is how to continue to deliver such impressive revenue growth over the coming years.

The Competition Commission Announcements in November 2016

The Competition Commission recommended to the Competition Tribunal that two proposed transactions by EOH, be approved without conditions. These transaction are the acquisitions by EOH of PIA Solar South Africa (Pty) Ltd (PIA) and Scan RF Projects (Pty) Ltd (Scan RF).

These announcements caught our attention as they highlighted EOH’s ongoing and relentless M&A strategy, a strategy that has been part of the EOH “DNA” going back to the year 2000.  This commentary provides an assessment of the EOH M&A activity over the period 2011 to 2016.

EOH Revenue Analysis

EOH reported revenues of R12.76 billion for its financial year ending July 2016. The 2015/2016 annual revenue growth was 31%, while the five-year compound annual growth (CAGR) was 39%. The following graph shows the EOH revenue reported from 2000 to 2016.

EOH Revenue 22.11.2016

Source: EOH Annual Reports 2004 to 2016

Revenue earned from M&A

A cautionary note –  EOH does not provide a detailed revenue breakdown of its individual subsidiaries, therefore we needed to make some assumptions. The value of this analysis serves to illustrate the revenue impact of the M&A strategy, as compared to accurately accounting for the different revenue streams.

We set-up the following revenue model to estimate the acquisition revenue contribution over the period 2011 to 2016:

  • We modelled the 2011 organic revenue per year from 2011 to 2016, this is defined as the “Core Revenue”;
  • We modelled the 2011 acquisition revenue per year from 2011 to 2016 + incremental acquisition revenue per year, with each year projected to 2016, this is defined as the “Cumulative Acquisition Revenue”; and
  • For simplicity, we assumed all revenue streams grew at the same annual growth rate per year.

Using this modelling approach, we calculated that in 2016, EOH had earned 63% of its revenue from cumulative acquisitions made over this period. The balance of 37% was earned from the growth of the 2011 organic revenue.

The following graph shows the two revenue streams.

EOH Revenue Analysis 22.11.2016

Source: Africa Analysis modelling of revenue streams

The CAGRs over the period 2011 to 2016 are as follows:

  • 2011 organic revenue          19%
  • 2011 acquisition revenue   77%

As shown, EOH’s revenue has enormously benefitted from its M&A strategy.

Two Year EOH M&A Track Record

The following diagram shows the M&A activity over the past 24 months. The M&A activity is shown in the quarter that the transaction was completed (as compared to the date when the transaction was announced). The M&A activity underlines EOH’s position as the most prolific M&A-driven ICT company operating in the SA market.

EOH Two Year M&A 22.11.2016

Source: Africa Analysis assessment of the M&A reported by EOH (2015 and 2016)

Shown in the M&A timeline are the transactions undertaken outside of South Africa. International M&A is to be expected as it is unlikely that EOH can continue to grow revenue, through M&A undertaken in the South African IT sector, at the rate that it has grown its revenue. There are just not enough companies that EOH can buy to continue to demonstrate the impressive annual revenue growth that it has shown.

The following figure shows a high-level application of the Africa Analysis M&A diagnostic model. This model determines the strategic intent of the acquisition regarding scale, customers, revenue and markets.

EOH M&A Analysis 22.11.2016

Source: ©Africa Analysis M&A Diagnostic Analysis 2016

Overall, EOH has driven the growth in finding new customers either in existing markets or new markets. EOH has also driven the acquisition of new capabilities that can be used to serve new and existing customers. The analysis also shows the drive to expand into adjacent markets.

Diversification Strategy

These acquisitions demonstrate the ongoing EOH diversification strategy. A review of some of the acquisitions made over the past 24 months shows the scope of diversification:

  • SCAN RF                          : Wireless infrastructure
  • PIA Solar                          : Alternative energy
  • JOAT Group                   : Civil engineering – water infrastructure
  • Mehleketo                       : Rail infrastructure
  • Paterson Candy           : Civil engineering – water infrastructure
  • Grid Control                  : Energy management services

EOH is building capacity in infrastructure technology – water, electricity and transportation.

Can EOH Sustain such revenue growth?

The key question is whether EOH can sustain such aggressive revenue growth? First, let’s explore possible revenue growth and M&A scenarios:

Scenario 1: If we assume the same CAGR of 39% for the next five years, and FY2016 core revenue grows at 19% per annum, then:

  • By 2021, EOH would reach R67 billion, or 5.3x its FY2016 revenue.
  • EOH will need to buy companies that contribute R27 billion in new revenue over this period
  • On average, EOH will need to add the equivalent of 15% in new revenues through M&A each year. EOH has shown an average of 15% new revenue growth per year over the five -year period. However, in 2016, the new revenue contribution from M&A was 10%.

Scenario 2: If we assume the average 2016 revenue growth of 31% for the next five years, and FY2016 core revenue grows at 19% per annum, then:

  • By 2021, EOH would reach R49 billion, or 3.9x its FY2016 revenue.
  • EOH will need to buy companies that contribute R14 billion in new revenue over this five-year period.
  • On average, EOH will need to add the equivalent of 9% in new revenues through M&A each year. EOH has shown an average of 15% new revenue growth per year over the five -year period. However, in 2016, the new revenue contribution from M&A was 10%.

Scenario 3: If we assume the FY2016 revenue growth of 10% for the next five years, and FY2016 core revenue grows at 10% per annum, then:

  • By 2021, EOH would reach R35 billion, or 2.7x its FY2016 revenue.
  • EOH will need to buy companies that contribute R12 billion in new revenue over this five-year period.
  • The assumption is that EOH adds the equivalent of 10% in new revenues through M&A each year. EOH has shown an average of 15% new revenue growth per year over the five -year period. However, in 2016, the new revenue contribution from M&A was 10%.

These scenarios show the outcome of revenue and M&A activity assumptions. Based on the scenarios, EOH will need to maintain an aggressive M&A strategy over the next five years to deliver similar revenue growth as it has shown over the past five years. Depending on how aggressive EOH sees its growth, it will need to add new revenue derived from M&A of between R12 and R27 billion of the next five years.

This is quite a challenge, and we expect that EOH will need to either seek international M&A targets and/or diversify into adjacent markets in the SA market.

Conclusion

The revenue analysis shows that EOH has successfully grown its revenue through an M&A strategy. Indexing revenues to FY2011, shows that by FY2016, EOH had earned 63% of its revenues from the cumulative acquisitions it had made over this period.

The EOH challenge, however, is how to continue to deliver such impressive revenue growth over the coming years.