THERE IS MORE TO THE TEN­CENT IS­SUE THAN MEETS THE EYE

Financial Mail - Investors Monthly - - Feature -

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.

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