CRUSHED BY THE GOLDEN GOOSE
It’s 20 years since Naspers took a R274m gamble on Chinese internet company Tencent. Today, its stake is worth R3-trillion — and that’s after it reduced its holding to 28%. But while a couple of trillion rand can solve a lot of problems, it can create a f
Most of Shenzhen’s 300 skyscrapers were yet to be built when, 20 years ago, Hans Hawinkels visited a modest set of offices in the Chinese city. He was chasing a lead on a possible investment opportunity.
That, after all, was his job. He’d been there since 1998, when Naspers boss Koos Bekker asked him to relocate to Hong Kong shortly after Britain handed the island back to the People’s Republic of China. And as CEO of MIH Asia, a Naspers subsidiary, Hawinkels was instructed to scour the Far East for investment opportunities, with a clear focus on pay television and the internet.
Hong Kong and Shenzhen are as far apart as Joburg and Pretoria, so for Hawinkels hopping across to the city on the mainland was not the biggest trek.
He soon arrived at the headquarters of a start-up company, on top of a warehouse, where a few dozen people were working furiously on a fledgling instant messaging platform called QQ. Whatever QQ was, it was adding users at a viral rate.
By the time Hawinkels had his first discussions with Ma Huateng, the founder of this company named Tencent, about 20-million people were using QQ.
Ma (called Pony Ma because his first name translates as “horse”) and his team were not happy with their investors, and wanted a stable financial and strategic partner, Hawinkels tells the FM. At the time, Naspers was far from sold on the idea.
“The executive management team [at MIH and Naspers] had reservations about investing in Tencent. Most of them were against putting more money into Chinese internet ventures,” says Hawinkels.
At that stage in 2001, Naspers had already forked out $80m on deals Hawinkels and his team had brought to the table. It might not sound like a lot by today’s standards, but the Cape Town-based company’s market capitalisation was a humble R4bn at the time.
“I was adamant that it was a good opportunity. [Bekker] was able to convince the team that we should invest,” he adds.
Had the company opted for discretion, it would have been the investment equivalent of failing to sign the Beatles. It was, looking back 20 years later, the deal of the century. According to some metrics, Naspers’s investment in Tencent is actually the best investment in any company, ever.
Naspers paid R274m for 46.5% of Tencent
in 2001. Today, even though Naspers has reduced its stake to 28%, its investment in Tencent is worth R3-trillion. Tencent, the Chinese company that launched QQ, WeChat and a host of best-selling computer games, now dwarfs the value of Naspers, and the rest of the JSE. It’s worth more than the world’s top 10 mining companies together.
A couple of trillion rands can, of course, solve a lot of problems. But as Bekker’s successor Bob van Dijk knows all too well, it can cause a few too.
The nightmare discount
These days Naspers holds its stake in Tencent through Prosus, an Amsterdam-listed company it created two years ago.
But Van Dijk has spent a good deal of his seven years as Naspers CEO grappling with the most enviable of dilemmas: how to handle a windfall so big that it is tearing at the financial fabric of an entire nation.
The “problem” is this: Naspers, thanks to its soaring investment in Tencent, has not only wildly outperformed the JSE, it has effectively outgrown it.
Over the past decade, Naspers has delivered a total return to shareholders of 1,130% — far exceeding the rise in the JSE’s all share index of 115% during that time.
Asset managers, which invest pensions, have consistently been forced to sell their Naspers shares, as their mandate doesn’t allow them to hold more than 10% of their portfolio in any one stock.
As a result of this “forced selling”, analysts say (and Van Dijk admits it too), Naspers’s shares trade at a discount to just its stake in Tencent. In other words, Naspers’s investors aren’t getting full value for their shares.
In real terms, Naspers is valued at R1.3trillion but its 28% stake in Tencent is worth R3-trillion. It means that not only is every other asset in Naspers — its stake in Takealot, Media24 and e-classified business OLX, for example — not reflected in the share price, it is being valued at less than zero. The speed of the wealth creation in Tencent has left Naspers far behind.
SA has, in many respects, become an economic basket case in the past decade as most of its fundamentals — infrastructure, human capital, competitiveness — have lost ground. But its international investment position, counter-intuitively, has improved.
All of which has left Van Dijk with a huge headache that he just can’t seem to fix.
Two years ago, he bundled together all Naspers’s internet assets — including the Tencent stake — into a new company called
Prosus, and listed those shares on the Euronext exchange in Amsterdam. This, he hoped, would woo new European investors, and reduce the Naspers discount.
Only, it didn’t work.
Now he’s trying another manoeuvre to try to smooth out the distortions caused by the success of the Tencent investment. This new machination, announced last week, will help Prosus buy 45.4% of Naspers N shares — reducing Naspers’s weighting on the JSE — and, fingers crossed, narrowing the discount.
(For those new to Naspers, it has two classes of shares: A shares, which hold most of the voting power; and N shares, which hold the economic interest. Regular Joes, like you, me and your pension fund, own N shares. Controlling Joes, like chair Bekker and friends, own A shares.)
But Prosus swapping its own stock for shares in its parent company? If it sounds complex, it is.
In a nutshell: Naspers will still control Prosus (and that all-valuable stake in Tencent), while Prosus is offering 2.27 of its shares for each Naspers N share; more of Prosus’s shares will be listed on the Euronext; and Naspers’s weighting on the JSE weighted index will fall from 23% to 15%.
It’s not about tax, Van Dijk tells the FM. “Some people are making the assumption that by moving some of the market cap, the tax base also somehow moves,” he says.
“The idea that we structure heavily to avoid tax in certain jurisdictions is simply not true. It is about addressing the discount and getting Naspers to a more sustainable size on the bourse.”
You can, of course, see where this misconception comes from: other tech giants, such as Apple, shift their headquarters around to dodge tax. But not Naspers, the company insists.
Van Dijk believes that not taking this step to effectively reduce Naspers’s size on the JSE would mean it would swell to account for more than 50% of the local stock exchange within the next few years.
“And I don’t think that would be good for anybody,” he says.
In that case, asset managers would have to sell more of their Naspers shares, and that gaping discount would yawn ever wider.
Van Dijk reckons this new gambit will lure more international investors, and create immediate value for Naspers and Prosus shareholders. The full details will be contained in a prospectus, but the swap is expected to be finalised between July and October.
One implication is that Prosus will become a far more “international” company,
What it means: Naspers, thanks to its soaring investment in Tencent, has not only wildly outperformed the JSE, it has effectively outgrown it
with more overseas shareholders. If it seems as if this shifts Naspers — a company that opened its doors in Cape Town in 1915 and launched newspapers like Die Burger and Beeld — incrementally away from SA, it is by force of circumstance designed to deal with the unexpected consequence of buying the golden goose, Tencent.
Reinvention of a chat giant
“One very interesting thing is that the revenue that Tencent had 20 years ago does not exist any more,” says Stanlib analyst Graeme Teeling-Smith.
The company Naspers invested in all those years ago was simply a chatting platform. But the world was going mobile and, before long, Ma had stitched together a deal with China Mobile for a sliver of the receipts from the data traffic when QQ users connected to each other with their phones.
“Mobile phone and internet penetration at the time was significantly lower. Thanks to this revenue stream Tencent could soon profit from China’s significant growth in its internet user base and its mobile user base,” recalls Hawinkels.
It was, even then, a tidy little business but hardly something that would change the world. And besides, it was tethered to the whims of telecoms giant China Mobile.
“The company was beholden to the telecoms company for collecting the revenue,” says Avior Capital Markets veteran analyst Kevin Mattison. “It had to diversify its sources of income as a matter of urgency.”
This was a priority. The history of technology is littered with the corpses of the Kodaks, Netscapes and MySpaces which failed to do this. But the way Tencent did it — and the reason Teeling-Smith likes the company so much — is that it has been able to continuously evolve its business model into new revenue streams.
A few years after QQ, in 2011, Tencent launched WeChat, a super-platform that took off quickly on smartphones and now forms an integral part of everyday life for users in the world’s most populous nation. At last count, it had 1.2-billion active monthly users.
Nor did Tencent stop there. After launching WeChat, the company built an entire ecosystem that facilitates a large volume of small transactions, says Peregrine Capital analyst Justin Cousins.
It also did something that few analysts expected, but is something of a holy grail for tech companies.
“It not only increased its number of users, but also the average revenue it generates per user,” says Teeling-Smith. It is this growth in paying users that is propelling Tencent’s
profit and consequent stock-price rise.
In 2020, its revenue grew 28% to 482billion yuan ($73.9bn), but its profit growth exceeded that, climbing 67% to 160-billion yuan ($24.5bn). This is similar to Facebook (revenue of $84bn and profit of $29bn), but it far exceeds many other internet companies, which often struggle to monetise users.
Tencent has also been quite careful to not exhaust its patrons with too much advertising or too many pop-ups and add-ons — it is a delicate game that Ma and his team play at an expert level.
It is also constantly looking for new frontiers. Though it makes most of its money in China, it has branched out abroad. In online gaming, the company is a world leader, with mega-hits such as Fortnite and Honour of Kings produced by its subsidiaries.
When Van Dijk took the reins at Naspers, Tencent earned most of its profit from games. Since then, it has built other lucrative pillars too.
“The new growth centres for Tencent are in fintech, health care, education and in the enterprise space,” says Teeling-Smith.
Cousins says there’s more value in Tencent than simply the cash it generates from its services. “Over the past few years, it has built up an impressive portfolio of other investments, mostly in the form of minority stakes in promising startups,” he adds.
It has, in effect, evolved into one of the world’s largest venture capital investors.
“In addition to providing capital to these businesses, Tencent actively helps [them] by providing access to their massive user traffic, their cloud infrastructure and their payments business,” says Cousins.
To some extent, this is a defensive ploy, investing in technologies that could pose a threat to its other businesses. But if any of these take off (as Tencent did for Naspers), there is potentially immense value, he adds.
Here, because of Tencent’s scale, it could be a matter of trillions rather than billions. And that should be good news for Naspers — if it’s happy to just sit back and rake in the returns as a passive shareholder.
Reinvention of a media giant
But Van Dijk doesn’t like to be seen as a passive investor. So Naspers has been doing