Naspers’s try­ing Ten­cent co­nun­drum

Share­hold­ers could win if a stake in the Chi­nese firm is spun out — or they might rue the day

Mail & Guardian - - Business - Lisa Steyn

Share­hold­ers have for years been un­der the spell of stock ex­change dar­ling Naspers, en­am­oured by its good for­tune and as­tro­nom­i­cal re­turns as it trans­formed from an apartheid-era pub­lish­ing group into one of the largest in­ter­net com­pa­nies in the world.

But the magic is wear­ing off.

This has been prompted by a record penalty or “dis­count” — some R400-bil­lion in value — that the mar­ket has im­posed on Ten­cent shares held by Naspers, com­pared with those that are held directly.

This large dis­count has prompted at least one off­shore investor to de­cry the value de­struc­tion un­der Naspers’s com­mand pub­licly. At the company’s re­cent an­nual gen­eral meeting, most or­di­nary share­hold­ers voted against a con­tro­ver­sial re­mu­ner­a­tion pol­icy — with one con­cern be­ing that the company ex­ec­u­tives are re­warded hand­somely for the share per­for­mance of Ten­cent, whereas the rest of Naspers is a lag­gard run­ning at a loss.

Naspers’s 2001 in­vest­ment in the then lit­tle-known Chi­nese company Ten­cent has since seen it hold­ing the ma­jor­ity stake one of the largest in­ter­net com­pa­nies in the world. But Naspers’s other busi­nesses are drag­ging down the value of the stake it holds.

Ten­cent’s mar­ket cap­i­tal­i­sa­tion — as val­ued on the Hong Kong stock ex­change this week — is R4.9-tril­lion. The­o­ret­i­cally, Naspers’s 34% stake should then be worth R1.66-tril­lion. But Naspers’s en­tire mar­ket cap­i­tal­i­sa­tion was only R1.26-tril­lion this week — im­ply­ing a drag or a “dis­count” of R400-bil­lion, or 24% lower than the value of the Ten­cent share.

If Naspers were to un­bun­dle this stake, pro­po­nents ar­gue, it could po­ten­tially re­lease that R400-bil­lion into the hands of share­hold­ers.

As one an­a­lyst, Al­bert Sa­porta, pointed out in an open let­ter to Naspers chief ex­ec­u­tive Bob van Dijk in June, since the be­gin­ning of this year, in­vest­ing directly in Ten­cent would have pro­duced a 35% re­turn in rands com­pared with a 24% re­turn in Naspers.

In­vestors pre­vi­ously saw Naspers as a cheaper way into Ten­cent, with the view that the dis­count would ul­ti­mately dis­ap­pear, Sa­porta told the Mail & Guardian. Years later, this has not hap­pened. The gap has only widened, reach­ing record lev­els in midAu­gust this year.

Sa­porta said although South African in­vestors are de­lighted with the in­crease in the Naspers share price — trad­ing at R2880 a share on the JSE this week — “the fact of the mat­ter is there is a high dis­count and the company is not do­ing any­thing to ad­dress it”.

But in­vestors are grow­ing in­creas­ingly vo­cal in de­mands for Naspers to take steps to un­lock this value. How­ever, a tight con­trol struc­ture is a ma­jor bar­rier for or­di­nary share­hold­ers hop­ing to in­flu­ence how the company is run. Just 0.2% of the share­hold­ers hold 68% of the vote.

This com­plex share­hold­ing struc­ture was de­vised by the then proa­partheid Naspers when it listed on the JSE to en­sure that ul­ti­mate con­trol of the list­ing re­mained firmly in Afrikaner hands.

As it stands, some 440-mil­lion or­di­nary “N” shares trade on the JSE. Not traded on the mar­ket are just 970000 “A” shares. These re­ceive a frac­tion of the div­i­dends, but they have 1000 times the vot­ing rights of the or­di­nary shares. As such, the hold­ers of the A shares de­cide how the company is run — from ap­point­ing the board to re­mu­ner­a­tion. These share­hold­ers are not pub­licly dis­closed but it is known that Naspers chair­per­son Koos Bekker (the for­mer chief ex­ec­u­tive who took the ini­tial Ten­cent gam­ble), vet­eran Naspers direc­tor Cobus Stof­berg and San­lam are among those who hold A shares.

As a result, a ma­jor­ity of or­di­nary share­holder voted against a re­mu­ner­a­tion pol­icy (one par­tic­u­lar bone of con­tention be­ing that the chief ex­ec­u­tive re­ceives hand­some bonuses even though Naspers runs at a loss if Ten­cent is ex­cluded) — but it was passed any­way. The or­di­nary share­hold­ers had also voted against a res­o­lu­tion to place unis­sued shares un­der the con­trol of di­rec­tors.

Naspers has long ar­gued that it would not have had such suc­cess if it did not have this con­trol struc­ture. For one, the company and its supporters claim, it has helped to keep China happy in a sit­u­a­tion where a South African company holds the largest stake in a Chi­nese in­ter­net company.

Naspers’s head of investor re­la­tions, Meloy Horn, said the con­trol struc­ture en­sures Naspers is tol­er­ated in sev­eral mar­kets it in­vests in, where the cer­tainty of who sits be­hind the in­vest­ment is im­por­tant. Horn also noted that a Naspers mem­o­ran­dum of in­cor­po­ra­tion, ap­proved by the share­hold­ers in 2012, re­quires Naspers to main­tain this con­trol struc­ture.

Fur­ther­more, “many com­pa­nies in the me­dia and tech­nol­ogy sec­tors have sim­i­lar struc­tures”, she said.

Jean Pierre Ver­ster, eq­uity portfolio man­ager at Fairtree Cap­i­tal, agreed, not­ing that Ten­cent’s global in­for­ma­tion tech­nol­ogy peers — such as Facebook and Google — were held in com­pa­nies with struc­tures that en­sure the founders have con­trol.

But share­holder ac­tivist Theo Botha ar­gued that there is no rea­son this struc­ture — in­tended for sta­bil­ity in own­er­ship — should be used to push through a re­mu­ner­a­tion package that or­di­nary share­hold­ers voted against.

Botha be­came a share­holder in Naspers in 2015 and he said the dis­cus­sion about re­mu­ner­a­tion at the Naspers AGM this year was largely per­func­tory. “He [Bekker] knew he was go­ing to vote in favour of it.”

Botha said it was also prob­lem­atic that share­hold­ers were ex­pected to take res­o­lu­tions with such in­ad­e­quate lev­els of dis­clo­sure — he said he was only per­mit­ted to ask three ques­tions and no more.

“I don’t think I’m be­ing ob­struc­tive; I’m help­ing the company,” said Botha. “It’s very strange [that] as­set own­ers and as­set man­agers are not ask­ing more ques­tions … they are sup­posed to be driv­ing trans­parency. They are not do­ing enough.”

A spokesper­son for Al­lan Gray, which re­port­edly voted against the re­mu­ner­a­tion pol­icy at the Naspers AGM, said the as­set man­ager did not wish to com­ment. A Naspers an­a­lyst at An­chor Cap­i­tal, also with a share­hold­ing in the company, did not re­spond to a re­quest for in­put.

Sa­porta said: “It is cer­tainly not fair these guys get paid a for­tune for es­sen­tially do­ing noth­ing. Par­tic­u­larly the [chief ex­ec­u­tive].”

But Horn said there are di­verse views on the mat­ter of re­mu­ner­a­tion and that Naspers would con­tinue to dis­cuss it with its share­hold­ers and take on board their in­put to evolve its dis­clo­sure pol­icy. “The no­tion that the Naspers chief ex­ec­u­tive’s in­cen­tives are pri­mar­ily driven by Ten­cent’s per­for­mance is in­cor­rect,” she said.

But if or­di­nary share­hold­ers can’t even vote down a re­mu­ner­a­tion package at a time when ex­ces­sive ex­ec­u­tive pay has come un­der the spot­light glob­ally, it’s un­likely they have much to say about other burn­ing is­sues such as the pro­posed un­bundling of Ten­cent.

In his let­ter to Van Dijk, Sa­porta urged him to take steps to un­lock the trapped value. “I be­lieve the sit­u­a­tion for Naspers’s in­vestors is not fair and, as [chief ex­ec­u­tive], you have a fidu­ciary duty to in­crease share­holder value. I think a num­ber of mea­sures can be taken in or­der to rem­edy the above is­sue,” he wrote.

The most rad­i­cal among Sa­porta’s sug­ges­tions is to spin out the Ten­cent stake to free it from the R400-bil­lion dis­count.

Horn said var­i­ous fac­tors in­flu­ence the dis­count, but of late it is driven by some $16-bil­lion of cap­i­tal leav­ing South Africa. “As the largest company on the JSE, we suf­fer the im­pact of this more than others,” she said.

“It’s hard for us to course-cor­rect what is clearly a broader mar­ket phe­nom­e­non and try­ing to do so is likely to de­stroy long-term share­holder value. Ten­cent is one of our best­per­form­ing as­sets and is our play into the size­able Chi­nese in­ter­net and e-com­merce mar­ket,” said Horn.

She said Naspers is con­fi­dent Ten­cent will grow fur­ther and, by re­main­ing in­vested, it of­fered South Africans an op­por­tu­nity — one “they may not oth­er­wise have” — to ben­e­fit from this “phe­nom­e­nal story”.

Fairtree’s Ver­ster be­lieved an un­bundling would only un­lock value for share­hold­ers in the short term, but would have a neg­a­tive ef­fect in that the block share­hold­ing would dis­solve and Naspers would lose the power to in­flu­ence de­ci­sions taken by Ten­cent. Con­cerns about own­er­ship of the South African stake may also then be­come an is­sue for China.

Ver­ster said the large dis­count was a result of losses in Naspers’s other units, such as their e-com­merce busi­ness. “But these are largely be­cause of re­search and de­vel­op­ment, which are seen as ex­penses, and on ag­gre­gate there is a loss, but you could make an ar­gu­ment that these are in­vest­ments for the fu­ture,” he said.

Share­hold­ers con­tinue to hope that when Naspers’s other as­sets start mak­ing a pos­i­tive earn­ing, not only will it un­lock the dis­count but could even pro­vide a pre­mium. For the time be­ing, Ver­ster said it was good that Naspers man­age­ment was un­der pres­sure to nar­row the dis­count.

De­spite its con­trol struc­ture, Naspers could be swayed by pres­sure from or­di­nary share­hold­ers, Sa­porta said. “Naspers con­trols the company with its su­per-vot­ing shares but it doesn’t own the ma­jor­ity of cap­i­tal,” he said, not­ing that these in­vestors needed to ap­ply more pres­sure.

Botha said Bekker needed to move on. “We need a se­ri­ously in­de­pen­dent nonex­ec­u­tive chair­man and a ro­ta­tion of di­rec­tors.”

“It is cer­tainly not fair these guys get paid a for­tune for es­sen­tially do­ing noth­ing. Par­tic­u­larly the chief ex­ec­u­tive”

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