Last year, I delved into the intricate dynamics of Naspers/Prosus in a series of essays, exploring one of South Africa’s largest companies and its far-reaching impact. Now, as the landscape evolves and recent updates on their Net Asset Value (NAV) emerge, the unfolding developments offer fresh insight and excitement, marking yet another pivotal chapter in the company’s remarkable journey.
Last week Naspers/Prosus updated the market on their Net Asset Value (NAV). Many investment holding companies own private businesses, meaning they determine the value of their assets in-house. As you can imagine, there are some differences of opinion. In the case of Naspers/Prosus, most of their assets are listed, so the market determines the values, which makes their NAV statement more reliable.
As of the 4th of October, the NAV of Prosus’ holdings was $164 billion; $127 billion is the Tencent stake, $10 billion is other listed assets and unlisted assets are worth $25 billion. The rest is sitting in cash. The current market cap of Prosus is currently $108 billion, so it’s still trading at a huge discount to NAV.
In April 2023, I wrote an extensive essay titled “Naspers bitter sweet pill” — In a nutshell Naspers has always traded at a massive discount to the underlying value (NAV) of its assets. Even Investment bankers like Goldman Sachs had estimated that Naspers and Prosus were at 52% and 43% discount to NAVs before the restructuring announcement. As articulated on my Naspers Bittersweet pill essay, I expanded on how Naspers management had tried a few things to solve the problem;
- Firstly, they created and spun off Prosus, arguing that Naspers was too big for the Johannesburg Stock Exchange. This resulted in significant capital gain taxes for South African holders, and created a very complicated cross-holding structure between the two entities. Some investors warned management that a more complex holding structure would only increase the NAV discount.
- Lastly, they decided to sell down their Tencent stake and use the money to buy back their own shares. This worked in part, but they were getting close to Naspers’s buy back limit. Yesterday’s proposed transaction removes that constraint.
To try to reduce this discount, Prosus has been selling Tencent shares and using the cash proceeds to buy back their own shares. As of 30 September, Prosus has bought back 23% of its free float since the scheme started. That is a huge chunk of buybacks. Hopefully they are selling lots of Tencent shares at the moment, taking advantage of the Chinese stimulus bump.
This NAV gap-closing uplift is the main reason we still hold Naspers/Prosus in local accounts.
To permanently treat a migraine — deal with the symptoms don’t take too many aspirins
The cheapest and simplest way to reduce Naspers’s net asset value would be to sell the bulk of the Chinese portfolio company “Tencent holding”, or to spin Tencent out directly to current Naspers shareholders. (Tencent, which owns WeChat and some of China’s most popular gaming apps, has been a profitable investment for Naspers). Both options may seem unattractive to the Executive Management because it will mean a much slimmed down group, and significantly smaller executive pay packages and incentives which they have enjoyed over the years.
Naspers humble beginnings
Few people could have imagined that the biggest company in South Africa right now in a country largely built on the extraction and exploitation of mineral sources, would be a global creative, cultural and high-technology business making most of its money in China. Naspers has really come a long way since its humble beginnings as the publisher of “De Burger” and “De Huisgenoot” back in 1915 during the political dark ages in South Africa. The business has made various ground-breaking and innovative investments to diversify away from its declining core newspaper publishing business.
Launching MNet in 1985 was smart calculated move that laid a good foundation for Multichoice to become South Africa’s largest pay-TV company, while more subsidiaries like AutoTrader, Media24 and Takealot have become household names in recent times but these are dwarfs compared to their bet on the chinese early stage startup at the dawn of the millennium. What really elevated Naspers to be on the international pedestal was their $32million investment in Chinese start-up Tencent in 2001. However, the value of the stake continued to grow to a large degree, reaching about $200 billion in 2021 — not bad for a humble publishing and newspaper company.
This growth in Tencent had translated Naspers from a mere 5% of the Johannesburg Stock Exchange (JSE) 7 years ago to around 25% in 2021, in the process creating incredible wealth for South African investors. But Naspers had largely outgrown the SA market to the extent that further value unlock was difficult to realise.
Getting too big on everyone’s boots
Naspers has for the most part struggled for many years with its dominance on the JSE and its shareholders had long lobbied for the company to reduce the valuation gap it had based the relationship of its share price and international underlying assets such as Tencent that was extremely larger than Naspers value in South Africa. What a nice problem to have.
Why was this a problem ?
Large institutional investors in South Africa follow investment guidelines that discourage them from holding highly concentrated investments in single stocks. A large chunk of Investors would argue that a 20% in a share (i.e. Naspers’ weight in the index) is well beyond the realm of prudent investment principles. For this reason, funds will typically hold less than the index weight and tend to sell Naspers shares as the value rises, both of which create a drag or a trimming on the share price regardless of what Tencent is doing. This has assisted in creating a valuation gap between what Naspers is worth and what its share in Tencent is worth. This valuation gap in 2021 was over R500 billion, which also implied that all their other investments such as Takealot didn’t have much value, they were deemed worthless. To put this into perspective, consider the case for the Public Investment Corporation which was and still heavily invested in Naspers on behalf of the government employees pensioners, GEPF. They are the second biggest shareholder of Naspers after Prosus.
Consider this example
Naspers and Prosus combined was by far the single largest equity holding and asset in the Government Employees Pension Fund’s (GEPF’s) fold, and exposed the fund to extreme market risk. According to the GEPF’s financial statements for the year ended March 31, 2021 the fund held 76 million Naspers shares or 17 percent of the Naspers shares in issue valued at R268.7 billion. The GEPF’s exposure to Prosus was 14 million shares valued at R22.9bn. The fund’s combined exposure to Naspers and Prosus amounted to 26.5 percent of the fund’s exposure to listed equities, and 14 percent of the fund’s total investments including cash. That was despite a reduction from the previous year’s 31.1 percent of total listed equity exposure, after which the GEPF’s holdings in Prosus were slashed by 28.8 million shares. Sales by the GEPF therefore accounted for more than 16 percent of the total number of the 176 million Prosus shares traded on the JSE during the fund’s 2021 financial year.
The GEPF had to address the risks either through selling Naspers and Prosus shares outright in the market or through derivative instruments which in any case would have led to the selling of the underlying stocks by counterparties. In this case the GEPF was a forced seller.
Let’s assume that the PIC as manager of the GEPF did nothing since the end of the GEPF’s 2021 financial year, and held on to the original Naspers and Prosus shareholdings. By march last year, the value of the holdings would have been down by about R151bn or 51 percent. That action was going to be problematic for the SA government and pensioners at large, probably exposing investment managers at PIC of poor investment decision making.
Tencent is not tencent after-all
Tencent is a multinational Chinese technology conglomerate. It was founded in 1998, and its subsidiaries market various internet related services and products. One of the company’s most lucrative assets is WeChat, a Chinese messaging, social media and mobile payments app. In 2001, Naspers had purchased 46.5% of Tencent as an early-stage investor, and since then Tencent has grown into one of the largest companies in the world, making Naspers the largest listed company on the JSE by a substantial margin.
Prosus, a baby of Naspers now a fully-fledged international digital ecosystem investor and its parent company Naspers completed a share swap deal about 18 months ago where they had set up a cross-holding structure and moved majority of ownership of their international assets such as Tencents to Amsterdam stock exchange under the ambit of Prosus which listed back in 2019 to hold mostly Tencent shares. The share swap transaction in 2021 increased the size of the Prosus free float and more than doubled its ownership of the group’s outstanding global consumer internet portfolio elevating the company to be one of the largest publicity traded stock in Europe. It also helped to rebalance the oversized weight of Naspers on the Johannesburg Stock Exchange which at a time amounted to about 25% of the entire stock exchange due to their underlying position in Tencent. The deal involved Prosus buying 45% of Naspers shares, bringing its ownership in Naspers to 49%. Under the cross-holding arrangement, Naspers now owns around 59% of Prosus and has kept the voting control. The two companies share a single board.
The logic underlying the share swap was that moving a portion of the companies’ assets out of South Africa might improve their valuations. Both companies had traded at a large discount to the apparent value of the underlying assets they own for many years and executives argued that one reason was Naspers’ dominance of Johannesburg stock indices which was a bitter sweet for institutional investors. At this stage, Naspers had become way too big for the JSE. In fact, it had become such a headache for institutional shareholders that a large part of the company’s management’s time was spent trying to alleviate the discount.
The Share Discounting headache
One can argue that Naspers’ investment in Tencent was one of the boldest and wisest investment decisions that the company has ever made. Since then, Tencent has grown into a giant tech company in the world competing head to head with the likes of Amazon, Facebook and Google. Naspers was placed perfectly to reap the rewards of their investments in the early stages of Tencents at a time it was cheaper to take a position.
Naspers listed Prosus for the same reason back in 2019, but the underlying assets particularly Tencent stock continued to grow in value. Prosus is now rating at the same pedestal with Softbank’s Vision Fund, one of the world’s largest tech investors, with stakes in educational software companies, meal delivery firms and online marketplaces around the globe. Naspers remains the largest company on the Johannesburg stock exchange, but at least its weighting on the exchange leading share index has fallen to 14% from 25% which has become somehow a painkiller for institutional investors.
Swallowing the first Aspirin
Over the past few years, Naspers management have taken some key actions to try and narrow the discount, with the most recent being the deal with Prosus. However, to understand why the current deal came to fruition, we need to understand the previous actions the company has taken to narrow the discount.
2017–2018: Buying food delivery business
To bolster its portfolio of investments and create value outside of its Tencent holding, Naspers bought stakes in several food delivery platforms in 2017 and 2018 including ifood and delivery hero.
2019: Unbundling pay TV Assets
Naspers unbundled its South African and rest of Africa Pay TV asset that were held through the Multichoice Core Group. In addition, MCG was listed separately on the JSE. Management wanted to provide direct exposure to the value provided by MCG, instead through Naspers. Relative to the Tencent investment, Naspers other investments were valued appropriately through the group.
September 2019: Listing Prosus
Naspers internet assets (including Tencents) were sold to a new entity called Prosus. Prosus is dual-listed on both the Euronext Amsterdam and the JSE. Naspers is the majority shareholder of Prosus. The balance of the shareholding in Prosus that Naspers does not own is traded in the open market. The rationale for the transaction was twofold, (i) it was used to unlock value for shareholders and (ii) to access offshore investors.
In conclusion, as Naspers/Prosus continues to navigate the evolving market landscape with transparency in its NAV reporting and a focus on long-term growth, it remains a cornerstone of the South African corporate landscape, with its future developments promising to shape not only its own trajectory but the broader investment community as well.