Bekker’s Naspers gamble nets a fortune

The combined earnings of the United States’s 10 top-paid chief executives in 2014 is still more than $600-million shy of what Heidelberg-born Koos Bekker grossed when he cashed in the bulk of his shares in South African media company Naspers in recent months.

And the windfall, estimated to be as high as R20-billion, is almost 10 times what the highest paid US chief executive (the head of a Fortune500 company) earned last year.

Thanks to its peculiar nature, Bekker’s remuneration arrangement with Naspers is well known: for the 17 years that he occupied the position of company chief executive he did not draw a salary or benefits and took stock options as compensation.

Looking at the company’s current share price of about R1 700 and a price-to-earnings ratio of 97, clearly the risk paid off extraordinarily well. And in its latest annual report, Naspers showed Bekker had sold 70% (11.7-million) of his shares in the past financial year.

Under his leadership, Naspers made an investment of $32-million in then little-known Chinese tech company Tencent in 2001. It has been said this was either an exceptionally clever or exceptionally lucky move for both the company and for Bekker.

A year before the stake in Tencent was acquired, Naspers decided to swap its stake in mobile telephony (now known as MTN) for control of the pay-TV business. This came just before the entrance of new competitor Cell C into the market.

Since then, MTN has grown to become the largest mobile operator on the African continent and over the past five years has seen its market valuation grow by 40%. But Naspers’s has leapt by 440%, thanks to its investment in Tencent.

In fact, if Tencent – which recently surpassed Alibaba as the largest Asian stock – was removed from the Naspers equation, there wouldn’t be much to speak of. Naspers’s annual revenues, as shown in its latest annual report, would drop by more than R47-million, or 36%, for the year and its net profit for the year would shrink 95% from R13.95-billion to R784-million.

But it’s harder to tell where it would be in terms of market capitalisation because its value (R730-billion) would be obliterated, given that it currently trades at a discount when it is compared with the valuation of the Asian share, which boasts a market cap of about $161-billion and in which Naspers has a 34% stake.

Bekker might also have had nothing to show for his share options.

“He threw a handful of spaghetti against the wall and, while most pieces didn’t stick, one of the big fat pieces [Tencent] did stick,” said Jean Pierre Verster, an analyst at 36One Asset Management.

As a result, his share sale in the past financial year, which did not warrant a Sens announcement as he was on sabbatical, is estimated to have sold for as much as R20-billion.

Although, in reality, it could have been as low as R10-billion.

“Given that the exact strike price is unknown, it is difficult to calculate exactly how much he netted from the sale,” said Verster.

The strike price refers to the contractual price at which Bekker’s share options could be sold before a specified date of expiry.

As Bekker told Moneyweb this week, the profit was calculated as follows: “The market value of Naspers shares at the end of the five-year period, minus the market value of the shares at the beginning of the period, adjusted for inflation over the period. This resulted in a profit as the value growth exceeded the rate of inflation. On this profit, I paid tax at the marginal rate.”

Using the average share price during the period that Bekker sold, estimates are it would have been R20-billion. “But, given the strike price and tax, the end result was likely substantially less, probably around half,” Verster said. “He is a business genius if one looks at the wealth he has created for shareholders … Bekker’s remuneration arrangement served to focus his mind for value for long-term … But no one thought he would be that successful.”

Without Tencent, it is hard to say how well the underlying businesses are performing as Naspers’s disclosure has gone backwards in the past five years, because there is big push into e-commerce.

“It was a bit of a land grab and so it was difficult for them to say what they were doing and paying,” said Verster. “The cash that MultiChoice threw off was used to acquire businesses in the e-commerce sector … Those went through very steep J-curves where they made significant losses. These have only just started contributing positively and are not yet at break-even level in aggregate.”

But it is difficult to know how their businesses have done, said Verster. “Profit patterns are not the same as value creation … In e-commerce, things are a bit different. Losses can add up significantly before they flip the monetisation switch and start generating profits.”

The losses are in e-commerce but, structurally, the Naspers business in the worst position is clearly Media24 – it might be making profits but it has shrunk in size and is facing considerable headwinds.

Naspers’s only other cash cow is MultiChoice, which was one of the first direct-to-home pay-TV channels to be launched outside of the United States and now operates in 50 countries and in 10-million homes. But the service is also on the frontline in the changing media landscape.

According to Karen Willenberg, the director of regulatory and legal affairs at M-Net, for advertising revenues globally, online offerings are overtaking TV and it can be expected to happen in South Africa too. On top of this, restrictive policies, such as the department of health’s proposed outright ban on advertising alcohol, could see advertisers simply go to international online platforms where there are fewer regulations.

Broadcasting is one of the most heavily regulated sectors in the economy, she said.

Meanwhile, global video-on-demand platforms are gaining popularity and even the likes of Netflix are entering the African market.

“There are restrictions for local companies but not international ones,” Naspers’s chief executive of video entertainment, Imtiaz Patel, said. “It is basically cutting South African companies off at the knees, no question about it.”

Patel said the weak rand has also exacerbated the company’s dollar-denominated costs for satellites and content.

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