Tricky job for Naspers to spin off value
The obvious approach to the growing discount between Naspers and its investment in Tencent — which would be to unbundle the Tencent stake to Naspers shareholders — overlooks the peculiarities of the investment environment in China.
If there is to be a major restructuring aimed at tackling the discount it is much more likely, given these peculiarities, that Naspers would spin off all its non-Tencent operations and hold on to the hugely valuable 33% stake in the Chinese company.
Jean Pierre Verster of Fairtree Capital says he cannot see the Chinese authorities allowing a deal that might threaten the control of one of the country’s most valuable companies. “The Naspers control structure has been important from a Tencent perspective because it ensures neither Naspers nor Tencent is vulnerable to a hostile takeover,” Verster says.
This structure was made seemingly impregnable back in 2005 by then CEO Koos Bekker, when PSG’s Jannie Mouton launched a hostile bid for control. Bekker, who made the initial $33m investment in Tencent back in 2001 and has good relations with Chinese leaders, said Naspers had to be attack-proof to provide comfort for its business partners.
Earlier in 2017, Investec’s Brian Kantor speculated that Naspers might not be free to sell the Tencent stake. “Even if [Naspers] were willing sellers, such a disposal might well be subject to the approval of the Chinese authorities. These authorities would be concerned about who might acquire these rights to the revenue and income .... ”
Kantor said it was therefore invalid to value Naspers as if it could be easily disposed of at current market prices.
The situation is further complicated by the nature of Naspers’s ownership of the Tencent stake, which is effected through a contractual arrangement known as a variable interest entity.
TENCENT SHAREHOLDERS HAVE RIGHTS ONLY TO THE REVENUES, EARNINGS AND DIVIDENDS GENERATED
“Tencent Holdings in Hong Kong provides its shareholders with contractual rather than ownership rights,” said Kantor.
This means Tencent shareholders have rights only to the revenues, earnings and dividends generated by Tencent and not to the assets of the Chinese company, which, by law, can be owned only by Chinese citizens.
Any unacceptable move by Naspers could be challenged by the Chinese authorities, who might upend the arrangement.
When asked if there were any restrictions on Naspers’s ability to unbundle or sell its Tencent shares, Naspers group spokeswoman Meloy Horn said on Wednesday: “We’ve never considered selling our Tencent stake, so I’ve no idea whether there are any restrictions.”
Verster agrees it is more likely Tencent would remain in Naspers and other assets be spun off if there were any restructuring aimed at unlocking the perceived discount. He suspects something might be on the cards because Naspers has significantly beefed up its investor relations team in Hong Kong.
“They may be planning to list their e-commerce operations in Hong Kong,” Verster says, but he thinks this may still be some way off because the e-commerce businesses have still got to build a profit profile.
Talk of a major restructuring has dogged the company for years as shareholders, far from being grateful for access to a share of the huge Tencent bonanza, become increasingly agitated about the diverging fortunes of the Naspers assets. They fear Naspers’s other operations, particularly the cash-guzzling e-commerce assets, are soaking up a considerable chunk of the value being created by the Chinese internet powerhouse.
Tencent’s spectacular performance over the past three years has ensured that the issue comes up with increasing frequency. No results announcement passes without speculation of an unbundling. As far back as early 2015, Horn was emphatic the company had no plan to spin the Tencent stake off into a separate entity.
“As a global internet company, exposure to the world’s largest internet market [China] is strategically essential. Tencent provides that exposure through a highly regarded company with an exceptional management team,” said Horn.
This week, Horn repeated the message when she spoke to Moneyweb. She was responding to an open letter written to Naspers CEO Bob van Dijk by a Swiss-based advisory firm accusing him of destroying R334bn of shareholder value since his appointment in 2014.
Albert Saporta, MD of AIM&R, which has an unspecified number of shares in Naspers, points out that when Van Dijk took over,
the Tencent stake was equivalent to 90% of Naspers’s market capitalisation. This meant the value being attributed to its other operations was R34bn. Now the 34% stake in Tencent is worth 130% of Naspers market cap, which means the market is attributing a negative R300bn to the other operations. “In other words, in the last three years, R334bn of shareholder value has been destroyed,” writes Saporta.
SOMETHING MIGHT BE ON THE CARDS BECAUSE NASPERS HAS SIGNIFICANTLY BEEFED UP ITS TEAM IN HONG KONG