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Naspers, Prosus need buybacks to cut discount, as Tencent sale underwhelms

By David Whitehouse
Posted on Friday, 9 April 2021 10:44, updated on Sunday, 11 April 2021 16:51

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

A partial reduction of the stake in Chinese tech giant Tencent will do little to reduce the discounts of Naspers and Prosus shares unless followed up with more share buybacks.

Prosus, which was spun off by Johannesburg-based Naspers in September 2019 and listed in Amsterdam, this week raised $14.7bn selling Tencent shares. That reduces its stake from 30.9% to 28.9%. Prosus has committed not to sell any more Tencent shares for at least the next three years.

The size of the offering is “a slight disappointment”, says Travis Lundy, a Smart Karma analyst in Hong Kong. “Prosus noted recently that its non-Tencent businesses are growing faster than Tencent, so it would make sense to reallocate a little capital away from what is basically currently a 90/10 split.”

  • Prosus said in the statement that the three-year moratorium on Tencent shares is “in line with its long-term belief in the potential of the business.”

Investors in holding companies that trade at large discounts are often able to pressure management to carry out moves such as buybacks to cut the discount and give shareholders better value. But corporate voting structures at Naspers and Tencent which are overwhelmingly loaded in favour of insiders mean that management is effectively free to deal with the Tencent stake as it chooses.

The stake gives Naspers a financial scale and international visibility that it wouldn’t otherwise have.

Those benefits come at the expense of shareholder value.

For both Naspers and Prosus, wider discounts are likely in the short term as “the market is unlikely to give management full credit on creating minority shareholder value for the full $14.5bn raised,” says Wium Malan, an equity analyst with Smart Karma in Cape Town.

  • Another large buyback using the Tencent proceeds would help narrow the discount, but that’s not the plan, Malan adds.
  • Prosus said simply that the proceeds will be used to increase “financial flexibility to invest in growth, plus for general corporate purposes.”
  • In October 2020, Prosus announced a $5bn buyback of its own shares and those of Naspers.  Most of those repurchases have now been completed.

Fresh ammunition needed

The proceeds should be enough to fund both growth opportunities and share buybacks over the next two to three years, says Peter Takaendesa, head of equities at Mergence Investment Managers in Cape Town.

Moves such as asset listings and making rump assets profitable need time to execute, “but we would be surprised if no further action is taken over the next 12 months,” he says.

“We believe some of the proceeds will be applied towards share buybacks at a later stage – probably when the current Prosus buyback of Naspers shares nears completion.”

That point is in fact approaching fast. Sumeet Singh, an analyst at Aequitas Research in Singapore, estimates that Prosus has a current discount to net asset value (NAV) of 30%, while the Naspers discount is about 43%.

“All of the things that Naspers and Prosus have tried over the years to narrow the dreaded holding company discount, the only one that appears to be working is the buyback,” Singh says.

“Unfortunately, there is only another $1.2bn of it left for Naspers.” That means the discount may be set to widen, Singh says.

A better scenario for investors, Singh adds, would be if Prosus was free to sell down its Tencent stake as and when it likes.

Bottom line

Naspers and Prosus are destroying shareholder value by locking highly sellable Tencent shares within holding companies.

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