Prosus crafts best plan yet for ‘problem of prosperity’

WTHE DISCOUNT SOMETIMES WIDENED TO 60% AS PROBLEMS PILED UP ON TOP OF EACH OTHER

hat’s there not to like in the Prosus-Naspers crossholding entity’s latest attempt to crush a stubbornly wide discount at which the market values its shares and the value of its underlying assets? Not much.

The plan — under which Prosus will sell down its 29%, or R2.10-trillion, stake in Tencent in small chunks over a long period and return the money to shareholders — is a renewed stab at alleviating CEO Bob van Dijk’s corporate headache.

It delivered an immediate uplift. Shares in Prosus — which is controlled by Naspers via a convoluted cross-shareholding structure — jumped 18%, while its parent added more than 20% on the back of the news. Together, the duo added more than R500bn to their market capitalisations.

The positive market reaction should put a smile on the face of Van Dijk, the Dutchman who in 2014 took over an emerging market internet powerhouse which, thanks to its stake in Tencent, has made chair Koos Bekker’s $32m (about R500m in today’s money) bet on the then little-known Chinese upstart in 2001 one of the most successful punts in corporate history.

But the “problem of prosperity”, as Van Dijk puts it, emerged when the stake started to eclipse Naspers’ own market capitalisation, let alone its book value, prompting some shareholders to press him to do something to fix the financial inefficiency.

What followed was a string of corporate actions, including spinning off MultiChoice and showering investors with R82bn in cash over the past three to four years. Van Dijk’s biggest step was the Amsterdam listing of Prosus, which was positioned to give European investors starved of a sizeable internet company an outlet to park their money.

But it did not take long for Van Dijk to see that the complex series of corporate finance transactions did not fix the valuation shortfall. That prompted the company less than a year ago to come up with a complex deal, the upshot of which is a cross-holding structure in which Naspers owns a majority of Prosus, which in turn owns almost half of Naspers.

Needless to say, even that measure — which was meant to shrink Naspers’ outsized weighting on the JSE and make more Prosus shares available to trade freely — did not work. The discount sometimes widened to 60% or more as problems piled up on top of each other: dwindling risk appetite for unprofitable start-ups in a tightening global monetary policy environment; the Chinese government’s widening regulatory campaign against its vast technology sector; and Russia’s invasion of Ukraine.

As an increasing number of Prosus-Naspers’ shareholders will tell you, selling down the Tencent stake is the lasting solution, but Van Dijk needs to narrow the discount.

It should now also be reassuring that there is less risk of the Tencent windfall being squandered on a high-risk bet because Prosus has said the share buyback scheme will remain in place as long as the discount persists at “elevated levels”. Typically, the acceptable level for conglomerates like Prosus is between 10% and 20%.

To be sure, Tencent, a R7-trillion company, will continue to count Prosus as its biggest shareholder for a long time. That is not necessarily bad. For one thing, it keeps Van Dijk in the front row for useful insights into trends in the fast-evolving e-commerce sector. And second, SA savers, whose investments offshore are restricted by exchange controls, will continue to have big exposure in the world’s largest internet market.

Granted, the latest move does nothing to deal with other factors behind the problem, not least the control structure that makes Prosus immune to outside influence on strategy, bonuses and other governance issues. That is off-putting to a universe of active investors who want to have a say in its behaviour.

But Van Dijk has finally given investors the most convincing plan yet to tackle the problem that at times has shone an unforgiving spotlight on his salary.