THERE IS MORE TO THE TENCENT ISSUE THAN MEETS THE EYE
Bob van Dijk and his management team would have to be incompetent on a globally unprecedented scale to justify the opprobrium being hurled their way, writes Ann Crotty.
While he’s undoubtedly not worth the billions of rands coming his way by dint of the generous allocation of Naspers shares mindlessly awarded to the CEO, he cannot realistically be held responsible for the R400bn (give or take a few billion on any one day) valuation gap between Naspers’s market cap and its 34% stake in Tencent. Even the prospect of unending cash-guzzling by its eCommerce operations wouldn’t fully justify the huge discount.
Similarly, the idea that Naspers is free to unbundle this extremely valuable investment may also be way off the mark. Naspers has said there are no restrictions on its ownership of Tencent. However, there might be restrictions on its ability to re-arrange how it manages that ownership, including unbundling it or selling it off.
Given Tencent’s importance in the lives of hundreds of millions of Chinese it would not be unreasonable for the Chinese authorities to want a level of control. Recall how the SA bank regulators let Barclays know it wasn’t entirely free to dispose of its Africa operations? It is likely that a huge chunk of the discount between Naspers’s market cap and that of Tencent reflects concerns around Naspers’s ability to liquidate the investment.
As must be clear by now, Tencent is no ordinary investment; not only is it eyewateringly valuable, it is held in a contrived structure called a variable interest entity (VIE).
The Tencent VIE, in which Naspers is invested, gives shareholders a contractual claim on earnings and dividends generated by Tencent but provides no claim on the Tencent assets, which are based on the Chinese mainland.
Chinese law prohibits foreigners from owning IT assets. The VIE structure is a contrivance used to sidestep this law. Ironically, it has resulted in very few Chinese being able to buy shares in one of their country’s most valuable firms.
VIE schemes have generally worked smoothly. But the occasional blood-curdling challenge from the authorities is a reminder that everything runs smoothly until it doesn’t.
So while Van Dijk’s leadership may not inspire many shareholders, the VIE should take responsibility for most of the so-called discount.