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Naspers spin-off of MultiChoice will not narrow discount

By David Whitehouse
Posted on Tuesday, 12 March 2019 11:27, updated on Wednesday, 27 March 2019 13:15

Naspers' market cap is still less than the value of its stake in Tencent. REUTERS/Aly Song

The conglomerate has its own issues, that will require more than the odd spin-off to fix.

Why does South African technology conglomerate Naspers exist? So that value investors can find a way to buy China’s Tencent, of course.

  • In 2001 the Cape Town-based company paid just $32m for a 46.5% stake in Tencent, owner of the WeChat social network, in one of the most successful early-stage investments of all time.
  • Naspers now holds 31% of Tencent, and Naspers’ market capitalisation is less than the value of that stake alone.

So, investors in Naspers get Tencent at a discount, and everything else that the South African company owns for free. That adds up to an overall discount of around 40% to the Naspers share price.

Aside from Tencent, Naspers’ holdings include online classifieds marketplaces in more than 40 countries:

  • Letgo in the US, Avito in Russia and Netherlands-based PayU, which rivals PayPal in the developing world.
  • It also has stakes in Russian social network Mail.Ru, and Indian food delivery service Swiggy.

Now Naspers is starting to divest businesses, which in theory should make it more attractive.

  • In February, the company span off African pay-TV company MultiChoice on the Johannesburg Stock Exchange (JSE), the first JSE listing of 2019.

Ramy Taraboulsi, chief executive of Veritable Soft Innovations in Toronto, argued that investors can profit by buying Naspers while shorting Tencent in the expectation that the price discrepancy will eventually be reduced.

So what’s not to like? The answer is plenty.

1) Ownership structure

Markets can overshoot, but the Naspers discount is persistent: “If the market leaves it there, it’s there for a reason,” says Sebastian Spio-Garbrah, managing director at DaMina Advisors in Toronto.

The sheer size of Naspers in relation to the JSE is one problem. Institutional investors in South Africa face the need to avoid weighting their portfolios too heavily toward a single stock.

Worse, Naspers has a dual-class share structure that ensures effective insider control.

  • Company management holds unlisted A-shares, each with the right to 1,000 votes.
  • JSE-listed N-ordinary shares have one vote each. This allows management and directors to maintain control with only a relatively small block of shares.
  • A majority of A-class ordinary shares is held by the two companies that together comprise the control structure of Naspers.

Shareholder concerns over, for example, dividends are unlikely to get much of a hearing in that context.

The main reasons for the discount are a “lack of clarity regarding the non-Tencent part of the portfolio, lack of clarity with regards to capital allocation, management incentives and general communication,” says Carlos von Hardenberg, a founding partner at Mobius Capital Partners.

2) Value and risk

Spio-Garbrah agrees the discount seems “a bit large”. Investing in South Africa, he notes, carries a range of political risks centred on land reform, mining strikes and the country’s credit rating.

  • He says these factors lead to a discount of about 15% on South African assets.

President Cyril Ramaphosa has not achieved any major structural changes, Spio-Garbrah says. “He talks a good game but is running out of time to deliver.” He expects a drip-feed of bad news to come from South Africa. “I can’t see where the good news will come from.”

  • And he expects this discount for South African assets to remain in place after the elections in May.

What would Ben Graham, the father of value investing, have said? He would have loved the idea of assets for free. But when he wrote in the 1930s, he was also clear that foreign (non-American) stocks should be left to someone else.

  • In the modern context, read: risks on currency, politics, governance and transparency.

Bottom line: Naspers has a lot more to convince investors that it’s serious about lowering the discount – and the control structure means that management has little obvious reason to do so.


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