Success of Tencent cash cow poses unbundling quandary for Naspers
WHEN former Naspers CEO Koos Bekker decided to buy nearly half of unlisted Chinese internet company Tencent in May 2001 for around R260-million, it is difficult to imagine he realised just how good a call he was making.
Although Naspers’s stake was reduced to around a third when Tencent listed in Hong Kong in 2004, Naspers’s own market valuation has for years risen or fallen in tandem with that of its stake in Tencent.
What this effectively means, according to an analyst who asked not to be named, is that the market thinks the rest of Naspers’s business operations are placing a drag on the group through negative cash flow.
So if new Naspers CEO Bob van Dijk needed to invest further in the everchanging and highly competitive online landscape, he would have to raise equity against the Tencent stake which informs Naspers’s value, or sell off some of that stake to grow the rest of the group.
The most obvious option in the eyes of most shareholders, though, would be to unbundle Naspers’s underperforming internet classifieds and e-commerce businesses — which are not among the top players globally — along with its DStv pay-TV unit.
This would instantly unlock value for Naspers with cash circulated back to shareholders, but the analyst said the group structure — in terms of voting rights and management incentives — has until now weighed against the option shareholders would most like to see.
The analyst said that if Naspers was to offload the Tencent stake, there would be a liquidity discount because of the limited number of potential buyers — all of them most likely within China — and the possible tax implications.
There would be a further discount for the dilution of the Tencent stake’s seethrough value into Naspers, because management awarded itself shares for performance each year.
This, the analyst said, meant that if the market valued Naspers at R3 000 per share now, the value would drop to negative R400 a share.
“Instantaneously that R400 should dissipate, with some more value ascribed. I would say after settling of debt that remainder could be listed at a collective R600 per share, in terms of value to be unlocked,” the analyst said.
But Naspers’s dual shareholding structure prevents institutional managers from ever having sufficient voting rights to persuade management to embark on an unbundling process — although there is an upside in that the Chinese government prefers this arrangement to the possibility that Naspers could sell off its stake on the open market to a buyer it is not comfortable with.
The other factor is that Van Dijk and the rest of Naspers’s executive management team are incentivised to grow the non-Tencent businesses in the group, and the valuations Naspers’s executive places on those units to gauge performance is out of shareholders’ hands.
The analyst said investors could be hoping that the growing gap between Tencent’s highly cash-generative contribution, and the drag of Naspers’s other business units, will eventually reach a stage where management
The obvious option in the eyes of most shareholders would be to unbundle
decides to unbundle.
If this happened, Naspers’s share price — which has grown by nearly 6 000% since 2004 — could get another quick boost.
Vestact portfolio manager Byron Lotter also said Naspers was unlikely to unbundle any units in the near future.
“I don’t think management is too perturbed with short-term valuations and I think there are plenty of synergies among the businesses,” he said.
Lotter said Naspers’s plug-in to Tencent allowed it to leverage the fact that the Chinese company has “fingers in basically every pie the internet has to offer. When they push similar products into other countries I am sure they get a lot of advice from Tencent.”
Lotter estimated that Naspers subsidiary MultiChoice alone could have a market capitalisation of R100-billion, given its net income.