Investors query strategy as Prosus cuts Tencent investment and starts spending
After a strong end to the week running up to Easter as they rode on the coattails of Tencent, Naspers and Prosus had a less than spectacular ride this past week: the sale of a 2% stake in the Chinese internet and gaming giant was met with a cool response by the market.
A three-year lock-up following Naspers’s last disposal of a 2% stake in Tencent expired in March and Prosus, which now houses the investment, was quick to act with the sale of almost 192 million shares for $14.6-billion (R212-billion) at a 5.5% discount to the Hong Kong-listed group’s share price on Wednesday. Again, it’s agreed to a three-year moratorium before it sells again.
Prosus says the move will give it more financial flexibility to invest in its growth businesses. Its commitment to Tencent, its most valuable asset, remains steadfast.
“Through the sale of this small portion, Prosus intends to fund continued growth in our core business lines and emerging sectors, as well as allow for complementary acquisitions,” the company said.
And it has already started spending, announcing on Thursday that it had co-led a €223-million (R38-billion) investment round in Norwegian online grocery business Kolonial, which has been rebranded Oda.
Shareholders may not be onside, however. In a client note, analysts at FNB said the sharp pullback in both companies’ shares on Wednesday may have been a function of shareholder mistrust in the strategy, but could also have indicated unhappiness about the quantum of the sale (too small) or the new three-year lock-up (too long).
“My guess is that the market’s negative reaction to Prosus selling 2% of Tencent is that the market is sceptical of the group’s other investments and unconvinced as to management’s capital allocation,” said Keith McLachlan, investment officer at Integral Asset Management.
Aeon Investment Management chief investment officer Asief Mohamed believes the companies haven’t gone far enough with the latest disposal and that the passive investment in Tencent should be listed in a separate listed entity with minimal overheads to avoid further leakages that may result in the newly listed entity trading at a discount.
“The board and management should stop using the Tencent dividend as a crutch to support the food delivery losses or cash burn which may or may not deliver long-term value,” Mohamed told DM168.
“Maybe the additional 2% sale of Tencent might be a precursor to list the Tencent holding separately on the JSE and the Amsterdam bourse.”
The stake sale comes as both companies struggle to reduce the significant discount they trade at relative to their underlying investments, which are dwarfed by Tencent.
Prosus is close to completing a $5-billion share buyback programme, launched last November, with the aim of repurchasing up to $1.37-billion of its own shares and up to $3.63-billion of Naspers shares. It gave itself a year to complete the programme – or sooner if the maximum consideration is reached before then. Although the buybacks weren’t aimed specifically at addressing the discounts, the companies did plan to take advantage of share prices that were viewed as way too cheap.
Although Mohamed believes the share buyback was a “terrible decision”, others believe a much bolder approach is required, including a much more substantial, multiyear buyback programme that would have a sustainable impact on the real value of the combined groups. It has the firepower to do so, with over $250-billion in highly liquid listed assets, including Tencent.
Still, the buybacks may have had some measure of success. According to a research note by JP Morgan Cazenove on 25 March, the discount Prosus trades at, relative to its listed sum-of-the-parts, has narrowed to 27% from 32%, while Naspers’s discount is now 43%, from 50% previously. Their combined discount reduced to 39% from 45% in February. The discount is bigger if you include unlisted investments, but that is also narrowing.
After investing $32-million in 2001 for a 46.5% stake in Tencent, which has been reduced over the years, achieving $14.6-billion for a 2% stake isn’t a bad outcome. But just think how much richer the companies and their shareholders might be if they had held on to the entire initial investment.
Huge Group outbid for Adapt IT
Huge Group’s all-share offer to buy Adapt IT appears to be dead in the water after Canadian group Volaris came in with a higher cash bid. And it seems to have management on its side.
Volaris, a subsidiary of Toronto-listed Constellation Software, is offering Adapt IT shareholders R6.50 a share in cash, with the option to remain invested in the unlisted company if it gets sufficient support for its offer to take control and delist the company. It clearly has the support of Adapt IT, with an independent board already recommending the deal. That’s in stark contrast to the reception given to Huge Group’s unsolicited offer back in January.
Huge planned to offer 0.9 of its shares for each Adapt IT share. Based on a reference price of R6.13 per share, that valued the bid at R5.52 per share when it was announced. It’s worth less now. This week, Huge Group said it had been granted an extension by the Takeover Regulation Panel for the distribution of the offer circular to Adapt IT shareholders until 16 April. Huge shareholders have already given their approval. Adapt IT’s independent board was quick to recommend Volaris’s offer, but it has yet to make a recommendation on Huge’s bid after appointing Nodus Capital to give an independent opinion.
The Volaris offer represents a 56.9% premium to Adapt IT’s average share price over the 30 days up to 26 January, the day before Huge made its offer. It’s 56.3% higher than its closing price on 1 April, the last trading day before the two companies agreed to pursue the transaction.
Adapt IT says the successful conclusion of the Volaris offer will result in a well-governed, diversified South African technology company with high growth ambitions being backed by a well-capitalised leading global technology firm keen to support this growth.
The market appears convinced the deal will go ahead. After largely ignoring Huge’s advances, Adapt IT’s shares jumped 33% following the news.
PPC shares shrug off JSE probe
PPC’s shareholders don’t seem too concerned about a possible insider trading probe following the spike in its share price after it reached a debt agreement at its PPC Barnet operation in the Democratic Republic of Congo (DRC). Although you’d expect a positive response to the deal with lenders to PPC Barnet, which basically ring-fences its DRC debt and removes the risk to its local balance sheet, PPC’s shares started rising days before the deal was made public.
The JSE says the price increase in PPC shares over approximately the last week prior to the announcement on 31 March was close to 30%, and it increased a further 10% to R2.40 between the time of the announcement and the market close.
The JSE’s director of market regulation Shaun Davies says the exchange is reviewing the trading activity in PPC shares because of the significant rise in the price and the increased trading volumes ahead of the deal.
“If we believe that the trading activity warrants further investigation, we will refer it to the FSCA [Financial Sector Conduct Authority] for their consideration,” says Davies.
PPC says it’s not aware of any formal investigation but it’s ready to assist if it comes to that. Although it has all the necessary processes and procedures in place to limit access to confidential information, complex projects such as the capital restructuring project involve numerous parties and the risk of information being leaked is therefore not fully under its control. Still, it doesn’t believe there has been irregular trading based on the share movements data analysed until now.
In fairness, PPC had targeted 31 March for the announcement of a deal so the share price movement ahead of that may just have been pre-emptive buying. Its shares have since topped R3, indicating that investors are comfortable with the outcome.
The board and management should stop using the Tencent dividend as a crutch to support the food delivery losses or cash burn which may or may not deliver long-term value