Caught in their own web

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Caught in their own web

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Published Date: 2021-06-14 | Source: INCE|Community | Author: The Finance Ghost

Caught in their own web

Look at those Spider-Mans (men?) pointing at each other. In finance, this would be called a cross-holding. I hold shares in you and you hold shares in me. Does it make sense to put together a structure like this? Does it simplify matters and help people understand the business?

Of course it doesn't. Unfortunately, here is the verbatim description of what Prosus and Naspers are trying to do:

"Prosus intends to acquire 45.4% of the issued Naspers N Ordinary Shares in exchange for newly issued Prosus Ordinary Shares N, which would take its overall interest in Naspers to 49.5%, given the Naspers shares Prosus already owns."

It sounds like a worst nightmare from a SAICA qualifying exam question focused on the most complex applications of IFRS. Passing that test isn't easy, but it's easier than the position lead independent non-executive director Hendrik du Toit finds himself in.

It's a widely-held view that Bob van Dijk, CEO of Naspers, simply doesn't care about what asset managers think. By putting hundreds of millions of rands in his pocket every year, van Dijk's approach to criticism is best compared to the Mr Bean scene where he is hanging out the sunroof of his Mini, flipping the you-know-what at the world in general.

In such a case, the independent board becomes the channel of communication for shareholders concerned about the governance issues in the group. We now have a situation where Hendrik du Toit is facing a significant conflict of interest. This is because asset managers have come together to express their distaste at this latest proposed transaction.

Du Toit is the founder and CEO of Ninety One, the asset management business spun out of Investec. 

The conflict has now arisen from an unprecedented situation in which 36 asset managers have come together as one, including 36ONE Asset Management in a prime example of the universe having a sense of humour. Ninety One elected not to be part of this initiative, although du Toit was in an impossible situation either way.

If he sided with the asset managers, he would've been asked questions about why he allowed it to get to this point. By not joining the asset managers, questions are now asked of whether he is truly overseeing management or whether he endorses their efforts.

To help you gain a better understanding of what's going on here, I've written a simple explanation of the discount issue below. Read it before you listen to the interview Alec Hogg of BizNews had with some of the asset managers in the activist group. The video is at the bottom of this article.

Making a trillion rand vanish

Prosus N.V. is the most valuable business on the JSE by some margin. Its market cap of R2.3tn is substantial even by global standards. Although the company holds a number of investments in international businesses operating in industries like classifieds and food delivery, the primary focus of investors is on the stake in Tencent.

Prosus sold 2% of Tencent in April, reported by Reuters to be the world's largest-ever block trade (a private trade organised off-market in order to offload a large stake in a company). 2% isn't usually considered a big stake, but with a value of over $14.6bn at the time, it becomes important to do a trade like this in an orderly manner. Even then, the deal was done at a 5.5% discount to the closing price at the time.

The Chinese internet giant is worth nearly $740bn, or over R10tn. The block trade took Prosus' stake in Tencent down to 28.9%. Even if we ignore everything else in Prosus, this implies the Prosus market cap should be almost R3tn (vs. the current R2.3tn).

The other businesses are hardly immaterial, contributing around 20% of the group's look-through revenue exposure across all its investments. They are loss-making at EBITDA level, but since when did international investors with laser-eye profile pics on Twitter care about anything beyond the revenue multiple?

There's no doubt that the other investments could easily be sold and the cash returned to Prosus shareholders via buybacks etc. To assume the market is "ignoring them" is a convenient excuse for management. The market is including them in the discounted valuation.

Whichever way you cut it, there is an argument to be made that there could be R1tn of discount to net asset value in Prosus. Around R700bn of that is directly observable in the Tencent stake. To put just the R700bn discount in perspective, that's the same size as the Anglo Platinum and Vodacom market caps combined.

Once you've defeated Prosus as Player One in the discount to NAV game, get ready to face the Boss Level: Naspers. It makes the Prosus discount look like a fairytale.

Naspers holds around 73% in Prosus. Just based on Prosus' current market cap, Naspers should be worth nearly R1.7tn. That's if we completely ignore the other investments in South Africa, including Takealot (by a country mile the eCommerce leader in SA) and Mr D, among numerous other startup investments.

Naspers is trading at R1.3tn. That's another R400bn lost to the world, thanks to the listing structure.

In summary, we can easily identify over R1tn in discounts by doing basic maths on Tencent and we can safely conclude that the number is much higher because of the other investments in the group.

It's no wonder that asset managers are so upset. I fully agree with their views on this.

Alec Hogg of BizNews managed to bring together a few of the asset managers who are part of this latest example of shareholder activism. The interview is fascinating and well worth a watch:








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