/ 20 June 2021

Naspers and Prosus in share swap Catch-22

Day Three Of The World Economic Forum (wef) 2020
Bob van Dijk. Photo by Jason Alden/Bloomberg via Getty Images

“The golden rule, I will venture, is that the more complicated you make things, the more you turn investors off.” That was the view of Mike Gresty, analyst and fund manager at Anchor Capital, this week after Naspers and Prosus announced it would kickstart a share swap between the two companies. 

The internet company, Prosus announced on 12 May its plans to acquire 45.4% of the issued Naspers N ordinary shares, which give shareholders minimal or zero voting rights, in exchange for newly issued Prosus N ordinary shares. 

If the plan succeeds, it will take Prosus’s overall interest in Naspers to 49.5%. It is expected that Naspers’s holding of Prosus shares will reduce from 73.2% to 57.2%. 

A statement issued by Prosus said: “Due to the resulting cross-holding, the transaction would more than double the Prosus free float’s effective economic interest in the group’s underlying businesses to around 60%. This is expected to increase the value of the Prosus free float to $100-billion.”

The share swap is the latest attempt by Naspers chief executive Bob van Dijk and its management to close the discount gap between Naspers and the value of its underlying investments, particularly its 31% holding in the Chinese internet company, Tencent.

Naspers acquired Tencent in 2001 before the company grew in value, resulting in Naspers making up almost a fifth of the JSE.

Gresty said Naspers went from a 47.5% discount (a stock issued at a price below its face value) to 51% early this week and most of that decline occurred on the day the company decided to inform investors of its plans. 

Prosus’s discount went from 39.9% on 11 May and was at 36.3% on 10 June. 

“This price action could imply that investors who have been holding Naspers in anticipation of a big value unlock have sold their shares and given up on that trade,” said Gresty. 

He said that in his experience, investors, particularly offshore ones who have various global technology investments to choose from, tend to shy away from “complexity”. 

These shareholders limit the time they allocate to looking at investments and if there is a complexity that they have to understand, they lose interest. “Frankly, unless it is an unbelievably interesting story, they would not bother to start; they will allocate their time to other things,” he said. 

It was reported last week that 36 asset managers sent a letter to the boards of Naspers and Prosus airing their concerns about the proposed share exchange. 

Their issue is with the complexity and whether this action will bring any value. 

“As a matter of principle, we are of the view and experience that the introduction of cross-shareholdings between two companies inhibits subsequent corporate restructuring and defers the potential unlock of trapped value,” the letter read. “It would be unique for this instance to result in the opposite.” 

But the companies have maintained that the transaction is in the best interest of their shareholders. 

Neelash Hansjee, an analyst at Old Mutual Investment Group, said that even though the management team said it had put a great deal of thought into the exchange, he still does not think it will help shareholders. 

Hansjee said there are examples of companies in a cross-holding share corporate structure and those examples point to the discount widening. 

He said the solution Naspers and Prosus are offering does not solve the problem, because the weight is being reduced but a structure is being created where the discount will be wider. 

Prosus’s shareholders have been asked to vote on the transaction at the extraordinary general meeting on July 9.

Despite the concern, Kondi Nkosi, South Africa’s country head for global asset manager at Schroders, said others have welcomed the news, specifically that it will reduce Naspers’s weighting on the JSE from 23% to 16.9%. 

He said Naspers had long been the biggest constituent of the local stock exchange. As a result, South African investors have been forced to sell their shares from time to time to reduce concentration risk.

The Media 24 Ltd. offices in Cape Town, South Africa. Photographer: Halden Krog/Bloomberg via Getty Images

“But the risk of being too exposed to a single company is not a new issue for investors in an emerging market context. Korea and Taiwan, for example, also have highly concentrated indices,” he said. 

Schroders has used Morgan Stanley Capital International (MSCI) data to look at the concentration of some of the world’s major markets. It found that the biggest stocks on Korean and Taiwanese indices account for 31.6% and 44.1% respectively, with Naspers accounting for 32.6% of the MSCI South Africa index.

Nkosi said the concentration risk is something South African investors need to be aware of, and that putting money offshore can be an effective way to improve the profile of an investment plan.

“Doing so can broaden your exposure to sectors that aren’t as accessible in the local market, like the aerospace or medical device industries, and significantly reduce your portfolio’s volatility,” he said.