Prosus’s outside investors split over share swap as transaction approved

In one of the strongest signs of discontent over a convoluted share swap, nearly half of Prosus’s ordinary investors have voted against the transaction.

Prosus, which houses Naspers’s global internet business including a nearly one-third stake in Tencent, unveiled in May the latest in a string of attempts to close the valuation gap between its market value and component parts, offering to buy up to 45.5% of its parent in exchange for its own shares.

As expected, the deal — which is intended to cut Naspers’s outsized weighting on the JSE and boost Prosus’s free float in Amsterdam — was approved at a shareholder meeting on Friday, with Naspers voting its 73% stake alongside just more than 53% of outside investors giving the deal the thumbs up. Overall, more than 90% pushed it over the line.

But nearly 47% of outside investors voted against it, underscoring shareholder grumblings over the deal, which is framed by Prosus and Naspers as one of the best ways to release value.

The outcome of the vote could be seen as an indication that many Naspers investors will not exchange their shares for those in Prosus, especially after complaints that the transaction would further complicate both companies’ already muddled governance structure.

It could also test CEO Bob van Dijk’s determination to address the long-standing financial inefficiency after a series of attempts have so far done little to shrink the discount to the sum of the company’s parts.

Prosus is valued at about €125bn, suggesting that a portion of its $200bn Tencent stake, its $39bn-valued e-commerce ventures and a $1bn minority holding in Russia’s Mail.ru are not reflected in its R2.1-trillion market capitalisation. The valuation widens further considering that parent Naspers also trades at a discount to its more than 70% holding in Prosus.

"We believe that the transaction is a critical step in creating a capital structure expected to unlock value for both Prosus and Naspers shareholders," Van Dijk said.

The complexity of the deal, which comes with the issue of a new class of unlisted shares to Naspers to avoid triggering a hefty tax bill, has not won favour with investors. Naspers and Prosus share prices have fallen about 9% since the plan was announced two months ago. Last month, 36 asset managers criticised the deal for its complexity and the incentives offered to the management.

Peter Takaendesa, head of equities at Mergence Investment Managers, which is one of the 36 firms, said investors who oppose the plan were likely to be concerned about reinforcing a system in which voting lies with a few players.

"I’m not opposed to the actual transaction — the commercial aspects of it — but I was more concerned about the corporate governance issues," he said, adding that the new class of unlisted shares would only "concentrate voting power in a few entities or individuals".

But the majority did vote for the deal, probably looking to reduce the discount of their shares and take the opportunity to switch into euro-denominated Prosus shares.

"It is probably not that surprising, given they are exchanging a lower discount share for a higher discount share, potentially locking in a profit," said Vaughan Henkel, PSG Wealth’s head of equity research.

The question is whether Naspers shareholders will submit their shares for the swap. "We think that it will be challenging to get 45% of shareholders to submit their shares."

gavazam@businesslive.co.za