Shareholders send Naspers a clear message about share-swap concerns
In a bid to reduce Naspers’s weighting on the JSE as well as narrow the discounts at which both Naspers and Prosus shares are trading relative to net asset value, management has proposed a convoluted voluntary share-swap arrangement.
Some investors don’t like it, but management has vowed to press ahead. This means it will vote the 72.5% stake that Naspers holds in Prosus in favour of the transaction.
“We recognise that this is not a simple deal and we know complexity is not your friend,” Naspers and Prosus CEO Bob van Dijk told Business Maverick. “But the outcome is not complex. The outcome is a great set of assets, 60% of which are listed on the Euronext and 40% on the JSE, and we have a cross-shareholding agreement that codifies this.”
Naspers sees no problem in voting its own shares in favour of the transaction.
“Naspers is the majority shareholder in Prosus,” he says.
But what of minority shareholders’ concerns about the complexity of the transaction, the cross-shareholding structure, the risk that this transaction will not address the net asset value discounts in the long run, and a possible misalignment in management incentives that could result in the discount between NPN and PRX shares widening?
These concerns have been documented in at least two letters. In other cases, asset managers such as Coronation and Allan Gray have opted to engage directly with the board to share their concerns.
Van Dijk believes that these concerns are being addressed: “At the Prosus level, there is support for the transaction, particularly given the fact that a bigger free float is being created. On the Naspers side, there are concerns, which investors are wrapping their heads around, and which management is engaging with. I have been called arrogant and tone deaf, but Basil [Sgourdos] and I have probably had 300 to 400 conversations with shareholders in recent weeks.”
In most cases, he adds, management was able to allay shareholders’ concerns – in particular, the issue of management incentives.
Shareholders have long complained that incentives should not be aligned to the performance of tech company Tencent, over which it has no control. But, in light of this proposed transaction, shareholders are also concerned that management’s incentives will be more aligned with Prosus than Naspers.
“This is not the case. My long-term financial health sits with Naspers,” says Van Dijk. He adds that one important reason for the transaction is to reduce the weighting of Naspers on the JSE.
“We have outperformed SWIX [the Shareholder Weighted Index] for years and so are 30% of the index. We will continue to outperform it, and if we sat back and did nothing, we would become 50% of the index and that would be irresponsible,” Van Dijk says.
“We have explored every possible angle and I don’t know that it is possible to make the transaction less complicated and still make it achieve its objectives.”
Albert Saporta, the Swiss activist and director of AIM&R, has suggested that Naspers spin the e-commerce business into a separately listed investment firm that holds Mail.ru, Delivery Hero, Trip.com, and other minor listed assets. These stakes are worth about €9-billion and doing this should prove more than enough to fund further venture capital investments, he says.
The company would have a market cap of €25-billion to €35-billion and would be a unique investment asset not only in Europe, but also globally. Prosus and/or Naspers then become trackers of Tencent.
Management, however, is not inclined to consider these suggestions.
Whether Naspers shareholders will be persuaded to swap their shares for Prosus shares or Prosus shareholders to vote in favour of the transaction at the extraordinary general meeting (EGM) on 9 July remains to be seen. What’s clear is that there is plenty more talking to be done.
“I can confirm that Naspers management has had no engagement with us,” says Zwelakhe Mnguni, CIO at Benguela Global Fund Managers. “We remain concerned that as co-investors our valid concerns were brushed aside. We are unhappy with the structure and what appears to be the bullying of outside shareholders.”
Peter Takaendesa, head of equities at Mergence Investment Managers, says that, although some of their concerns have been addressed, there are some corporate governance aspects of the proposed transaction that remain unresolved.
“We still do not have visibility on how some of the governance matters will be addressed. We will continue to engage on those matters and we hope the Prosus EGM coming up in July will provide another platform for all stakeholders to engage further.”
It is an unusual event when 36 high-profile asset managers elect to send a collective letter to the management of any company – it is the largest collaboration in the history of the industry – but this does not suggest that they are impervious to the dilemma that management faces.
“Unlocking the discount, no doubt, requires a number of steps and it is unlikely that they [management] will satisfy all their shareholders’ needs,” says Claude van Cuyck, portfolio manager at Denker Capital.
He says it’s important to continue applying the pressure. “I have little doubt that the intentions of management and the board are to ultimately unlock value for shareholders, so let’s see where this takes us.”
I have been called arrogant and tone
deaf, but Basil [Sgourdos] and I have probably had 300 to 400 conversations with shareholders
in recent weeks