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Mind the gap

19 March 2021 By Ed Cropley, Peter Thal Larsen

Naspers’ Tencent problem is as big as ever. The $100 billion South African company has long traded at a hefty discount to the value of its 31% stake in the Chinese internet giant, which is currently worth around $239 billion. The three basic causes remain the same: Naspers’ inability to easily sell the shares, its reluctance to do so, and its outsized weighting on the Johannesburg Stock Exchange. The last one looks the easiest to fix.

It’s two decades since Koos Bekker, then chief executive of a mostly domestic media group, spent $36 million buying a third of the Chinese tech startup. It proved to be one of the most lucrative investments in history, on a par with SoftBank boss Masayoshi Son’s purchase of a similar chunk of Chinese e-commerce group Alibaba two years earlier. Since it bought the stake Naspers has delivered a total return to shareholders, including dividends, of nearly 12,000% in U.S. dollar terms.

Even then, however, Naspers has lagged Tencent’s runaway value. In 2019 the South African group attempted to close that discount by moving its Tencent stake, along with investments in startups like Russia’s Mail.ru and German takeaway group Delivery Hero, into an Amsterdam-listed subsidiary called Prosus. The idea was that investors who wanted exposure to Naspers’ assets but were unwilling or unable to invest in a South African group could buy stock in the Dutch company instead.

Though the move initially helped, the gap has widened again recently. Prosus holds assets worth a combined $273 billion, using current share prices and Bank of America’s analysis of its unlisted investments. That’s well in excess of the company’s $181 billion market value. Meanwhile, Naspers’ market capitalisation is $31 billion less than the implied value of its 73% shareholding in Prosus. Put it all together and Naspers trades at a 49% discount to the underlying value of its share of the Dutch company’s assets.

The simplest way to address this would be for Prosus to sell its Tencent shares and distribute the cash to its investors, including Naspers. Yet this underestimates the difficulties of offloading a shareholding worth almost as much as South Africa’s gross domestic product. When Naspers trimmed its stake from 33% to 31% in 2018, Tencent’s share price nearly halved in the following six months. Cashing in such a profitable investment would also land Naspers with a South African tax bill for as much as $50 billion. Other potential ideas, such as distributing Hong Kong-listed Tencent stock to Naspers and Prosus shareholders, would also trigger big tax liabilities.

Another obstacle to a sale is Bob van Dijk, who replaced Bekker as Naspers chief executive. The Dutchman remains wedded to the Tencent stake. Besides its financial clout, the shareholding gives Naspers insight into the development of new tech businesses in the People’s Republic, which inform its investments elsewhere in the world. Though the company is in theory free to sell more Tencent shares after a three-year lockup expires on Sunday, it’s unlikely to do so.

And even if other shareholders disagree, there’s not much they can do about it. Naspers’ independence is guaranteed via two separate unlisted South African companies which hold a majority of super-voting stock. Prosus has a similar structure which kicks in if its parent’s stake in the Dutch subsidiary ever falls below 50%. These defences are another reason for external investors to mark down Naspers and Prosus shares.

That leaves the final problem: Naspers’ size relative to Johannesburg’s stock market. The company has long been the biggest constituent of the local exchange, with a weighting so substantial that local funds are periodically forced to sell shares to reduce their exposure to a single company. The Prosus spinoff addressed that problem by transferring a chunk of value to Amsterdam. But Tencent’s strong performance since – the Chinese company’s share price has almost doubled in the past two years – has dragged up the value of its largest shareholder. As of the end of February, Naspers accounted for almost a fifth of the local bourse, according to FTSE Russell data. That is once again weighing on its price.

Last October Prosus attempted to address the problem by announcing it would spend $5 billion buying back its own shares and those of its parent. A more dramatic option would be to swap more of Naspers for Prosus, offering South African investors shares in the Amsterdam-listed company at a discount of, say, 10%. If Naspers lowered its stake in Prosus from 73% to 65% in this way, $13 billion of value would shift from Johannesburg to Amsterdam. That would provide Naspers with some headroom on its local bourse and give investors an incentive to close the valuation gap between the two companies, especially if there was a chance of van Dijk repeating the exercise in the future. Provided Naspers hangs on to more than 50% of Prosus, its overall control and tax status should remain unchanged.

Such a reshuffle would not address the two biggest factors discouraging Naspers investors from attaching a higher value to the company: its inability to realise the full value of the Tencent stake, and its reluctance to do so. But tackling the South African overhang could help solve one-third of the problem.

 

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