Naspers’s stake in Tencent Music is worth a Tiger Brands
Tencent Music debuted at a valuation of about $21.3bn (R301bn) on Wednesday
Naspers’s stake in Tencent Music Entertainment Group is worth more than Tiger Brands’s entire market value, going by the Chinese music-streaming service’s initial public offering (IPO) in the US this week.
"The size and scale of Tencent Music is very impressive. Through its stake in Tencent, Naspers will have at least 16% exposure to this fabulous business," Vestact portfolio manager Byron Lotter said in a note to clients on Wednesday. "How lucky we are to have access to such scale," Lotter said.
Naspers indirectly holds about 17.9% of Tencent Music, but could take on a direct stake in the company. Following the IPO, Tencent said it planned to declare a special dividend to shareholders worth about HK$250m (R451m).
“Naspers will have the right to own shares in Tencent Music or may elect to take cash in lieu... No decision has yet been made whether to take the shares or cash,” a spokesperson for the company said on Thursday.
Tencent Music’s shares rose after they started trading in New York on Wednesday, valuing Naspers’ indirect stake in the company at R58bn.
Tiger Brands, SA’s biggest listed food producer, had a market capitalisation of R51bn on Wednesday.
Bloomberg reported on Wednesday that Tencent Music and its existing investors, including rival streaming service Spotify, had raised about $1.1bn after pricing its IPO at the bottom of end of its target.
The parties sold 82-million American depositary shares at $13 apiece, meaning Tencent Music would debut at a valuation of about $21.3bn (R301bn). Standard Bank, a top-10 constituent on the JSE, was valued at R281bn on Wednesday.
Lotter said the IPO was priced at the bottom end "thanks to market volatility, especially regarding anything related to China. Having read through the prospectus it is hard to determine how much of the business Tencent will still own. Before the listing they owned 61.6%, but they will still maintain control."
While most analysts remain bullish about Naspers and Tencent’s long-term prospects, some are concerned about concentration risks since Naspers accounts for about a fifth of the JSE. At the same time, Africa’s largest public company is worth less than its stake in Tencent.
David Nathanson, global equity specialist at Bellwood Capital, said it was risky for investors to replicate Naspers’s heavy weighting on the JSE in their portfolios.
"While we can make an investment case in favour of Naspers, we’d never hold anywhere close to 20% of our portfolios in this or any other stock."
Naspers was also exposed to regulatory risks and "the challenges of managing a sprawling business empire and a growing debt pile", Nathanson said.
One regulatory risk is that Tencent holds its internet operations through a variable interest entity in Hong Kong — an arguably precarious holding structure.
Naspers is trying to shake off its image as a mere proxy for Tencent. Naspers CEO Bob van Dijk told Business Day in November that the company, with a cash pile of $8.7bn, had a strong pipeline of potential deals and aimed to take advantage of declining asset prices.
The company said at the time that core headline earnings in the six months to end-September had grown 39% to $1.7bn thanks to a healthier e-commerce business and Tencent.
The classifieds unit turned profitable for the first time, while the broader e-commerce business, which Naspers has been investing heavily into using funds from MultiChoice and Tencent, reduced trading losses by more than a third to $209m.
Correction: December 13 2018
An earlier version of this story said Naspers's indirect stake in Tencent Music was 16% which has been updated to 17.9%.