EDITORIAL: Tencent discount needs Naspers to give up control of Prosus
CEO Bob van Dijk might have to wrestle with the valuation conundrum a while longer
Talk about nice-to-have corporate headaches, Bob van Dijk, the boss of Prosus, a unit of Naspers’ global internet behemoth, will tell you all about it.
The Dutchman has been preoccupied for much of the past five years since his appointment unlocking value trapped in Naspers’ share price, which continues to trade at a hefty discount to its 31% stake in its Chinese money-spinner, Tencent Holdings.
Van Dijk took over a consumer internet powerhouse, a top-10 global technology investor alongside Softbank, Facebook and Google.
That was all down to Tencent’s rapid growth, which helped Naspers grind out double-digit profits and deliver an uninterrupted flow of dividends. There was nothing to complain about. It was when the stake started eclipsing Naspers’ market capitalisation that investors started asking uncomfortable questions about Van Dijk’s bonuses and heaped pressure on him to take steps to unlock value.
An announcement in recent days that Prosus, which houses the company's international assets including the investment in Tencent, will shower investors with more than R82bn in cash through the repurchase of its own shares, is the latest attempt to tackle the valuation shortfall, which stood at $59bn. It’s a good thing.
For one thing, shareholders should take comfort in the explicit recognition by Van Dijk that the global hunt for consumer internet takeover targets has pushed prices to levels that would be difficult to justify. He has mapped out a sound plan to build Prosus on three pillars: online payments, food delivery and classifieds.
These categories enjoyed booming demand from consumers ordered to stay at home across the world in the global fight to contain the Covid-19 pandemic, triggering chase from other deep-pocketed companies forced to look for new revenue streams to make up for the sales destroyed by lockdowns.
In what is a seller’s market, shareholders would have rightly frowned upon an attempt to deploy a R120bn mergers and acquisition budget Prosus flaunted in April.
Even before the pandemic hastened the trend towards online shopping, food delivery and other technology platforms, and forced companies across the world to reckon with the new reality, Prosus investors were reluctant to give Van Dijk the thumbs up when he tried to buy a large UK food delivery business, Just Eat, for $8bn.
He walked away from the deal earlier in 2020 but to be back in the M&A scene a few months later when he put in a $9bn cash offer for eBay’s classifieds business, but the US company chose another bidder.
Having failed to clinch before valuations went through the roof and still grappling with the long-standing valuation mismatch, he was left with little choice than to hand the money to shareholders.
For most companies, that should be enough to make any of their problems go away but for Prosus it is a tiny, albeit laudable, step in breaking the shackles of being regarded as nothing more than a proxy to Tencent.
As of Monday, Prosus’s market cap of R2.8-trillion is just about 20% less than its stake in Tencent. Given that Naspers is worth roughly 30% less than the value of its 73% stake in Prosus, Van Dijk’s series of actions, including separately listing Prosus in Europe, have failed to narrow the discount.
And finance head Basil Sgourdos appears to acknowledge that there may be further actions to come: “We will also continue working on a series of initiatives to further address the consolidated discount to net asset value.”
With M&A deals largely out of the question and having signed a three-year lock-up to not sell any more of Tencent, Naspers should consider selling down its stake in Prosus to boost its free float in Amsterdam and attract more European institutional investors. That could help narrow the discount.
But the Prosus control structure makes it immune to outside influence on strategy and puts off a universe of active investors who want to have a say on its behaviour. Naspers owns 900,000 unlisted A-class shares, which carry 1,000 times more votes than ordinary shares, that kick in as soon as its Prosus stake falls to 50%.
It is hard to see Naspers giving up that control, meaning Van Dijk is likely to wrestle with the valuation shortfall for a while longer.
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