EDITORIAL: An elephant in Naspers’s room
Naspers’s stand-alone worth outside of Chinese internet giant Tencent has come to a head around the salary of CEO Bob van Dyk
Naspers is really one of the great marvels of South African business. Quite how a small, predominantly Afrikaans newspaper company could emerge as global technology player operating in more than 120 countries is truly extraordinary. Naspers is now the world’s seventh-largest internet company and has a market capitalisation of R1.2-trillion. Yes, trillion.
A lot of credit goes to adept, insightful and courageous former CEOs: Ton Vosloo and Koos Bekker. Yet now Naspers finds itself at an odd juncture. As market watchers know, the company’s investment in the Chinese internet company Tencent has exploded. That would be manna from heaven if not for one uncomfortable fact: Naspers’s stake in Tencent is now worth more than the market capitalisation of Naspers itself, and not just by a little bit. This "conglomerate discount" now stands at around 27% — and widening.
Effectively, the market is saying — according to one interpretation of market valuation — that not only is Naspers’s own business worth nothing, its entire global effort is a huge drain on its valuation.
It’s this kind of situation that makes the eyes of corporate financiers glisten. What would happen, they ask, if you unbundled the Tencent stake to shareholders and let the remaining business find its own value? The sum of the parts here would be greatly more than the whole.
Even if the company split, the instant valuation increase would be droolworthy.
The whole issue has come to a head around the salary of CEO Bob van Dyk because shareholders are asking a simple yet poignant question: why should any CEO get any credit for the growth of a business in which he or she has absolutely no influence? To make it worse, Van Dyk’s total pay package for 2017 came to just more than R60m, despite the fact that Naspers’s operating income excluding Tencent has dropped every year since 2013. Jeff Bezos, the CEO of Amazon, a company five times the size of Naspers, earned less in 2016.
Furthermore, Naspers has two classes of shareholder. Tightly held A shares control 68% of the voting rights. This is no longer allowed on the JSE, but when the rules changed, Naspers was "grandfathered" into the new system with its structure intact. At the recent shareholders’ meeting, around 66% of low-voting N-shareholders voted against the company’s executive remuneration policy and about 74% voted against the resolution to give directors control of unissued shares. This constitutes great shareholder disquiet.
When all is said and done, fund managers are right to be putting pressure on the Naspers board
To meet this argument, Bekker has argued aggressively that those calling for a break-up are "completely illiterate". People were "obsessed" with the conglomerate discount, but all big-four internet companies (Facebook, Amazon, Netflix and Google) contain conglomerate discounts.
Scale would be increasingly important in the future, and Naspers’s strategy of becoming the Amazon of the rest of the world needed time to mature.
On the face of it, these are strong arguments. In the early stages of business development, market share is the crucial issue, much more so than profitability. And scale is crucial.
But this does not obviate the argument that executives must be incentivised in line with the performance of parts of the company over which they have actual control.
And if revenue growth is the prime target, Bekker’s argument gets even weaker. Forward revenue growth for Tencent is projected at around 52%. Amazon is expecting 24%. And Naspers? Around 3%.
When all is said and done, fund managers are right to be putting pressure on the Naspers board. Their solutions might be self-serving, but their criticism is not out of place.