PICK OF THE MONTH

Alot has changed at Naspers over the past few months. The company has started taking steps to unlock value for its shareholders by unbundling the MultiChoice operation in a separate listing — concentrating Naspers as an online consumer business — and it has recently announced plans to restructure itself somewhat in order to list on the Euronext exchange in Amsterdam.

The restructuring transaction is not cheap, having a price tag of $140m.

But management believes it will “unlock” a lot more value than that.

What is the rationale behind this new listing, and how will it affect current shareholders?

In a nutshell, management believes that because Naspers’s market capitalisation is so large, the stock is too big for the SA market.

The company believes that due to its already huge index weighting in our market and the subsequently large allocation in both active and passive funds, most institutional investors essentially become forced sellers as the share price rises, so that their portfolios do not become too highly concentrated in just one share.

This, the company believes, is the reason Naspers is trading at a near 40% discount to its sum-of-the-parts NAV. The solution, it believes, is this relatively complex NewCo structure that will allow it access to a larger pool of investors.

Once on the Euronext exchange, NewCo will be the largest tech company listed in Europe. If it is included in the Euro Stoxx 50 index, as expected, it will have the 32ndlargest weight on the Euronext.

Further, it is likely to be included in the MSCI and AEX indices as well.

All this, management hopes, will open the doors to investors who have thus far been unable to buy Naspers shares due to restrictions on them by a mandate to not invest in emergingmarket stocks.

Once listed on a developedmarket exchange, management hopes the proverbial floodgates will open.

Considering that every 5% the share price increases by makes a $9bn difference to the valuation of the company, closing that 40%-odd valuation discount gap is definitely in shareholders’ best interest.

The exact details are not known, but shareholders will receive shares in NewCo, listed in Amsterdam, in proportion to the shares they now own in SA-listed Naspers.

Shareholders will, in fact, be able to choose which shares they would like, as they could opt to receive additional locally listed Naspers shares instead.

Naspers will own 75% of NewCo in any case, but Naspers might still be subject to “holding company discount”, while NewCo could probably trade at a higher, more accurate valuation.

I suggest that investors hang on to their NewCo shares.

This value-unlocking transaction is not the only reason Naspers is the pick of the month, though.

Finally, Chinese authorities have started approving digital gaming licences again. A few new game titles have been approved for Tencent, which means that earnings for its largest division is set to “return to normal”, so to speak.

Already Tencent’s share price has reacted positively, though what is more important is that the door is now wide open for a positive surprise in earnings numbers a quarter or two from now.

As we have seen in the past, good earnings from Tencent can have a tremendous effect on Naspers’ share price as well, and in the longer term, this and the NewCo listing can have a very positive outcome.

This aside, Tencent is a significant force in the digital gaming arena. Not only does it create and publish its own gaming titles, it is also invested in most of the other major digital gaming publishers around the world.

I have an ill-timed buy recommendation for gaming company Activision Blizzard on my record, but I still believe that we are grossly underestimating the enormous scale the digital gaming and e-sports industries will reach. Tencent, through its own publications and those in which it is invested, has access to the world’s most popular games and e-sports — and Naspers owns about 30% of it.

The value that will be unlocked by the NewCo listing and the long-term view of the gaming industry gives me two really good reasons to be invested in Naspers.

Shareholders will, in fact, be able to choose which shares they would like, as they could opt to receive additional locally listed Naspers shares instead