Naspers split: Will it hurt or help your JSE investments?
A new company will hold all of Naspers’s international assets, including Tencent, to be listed in Amsterdam
It’s difficult to decide whether the NewCo structure just created by Naspers is an elegant solution to a multibillion-dollar challenge, or a clumsy attempt to address the competing interests of a variety of parties.
For the past five years, Naspers’s primary problem has not been that it can’t sell enough newspapers or persuade more people to sign on for its tired satellite TV offering – it’s that a $36m investment made in 2001 has grown like Topsy. And it’s grown like Topsy in China, Tencent’s home, where things are a little different – that difference is only one part of Naspers’s challenge.
Naspers is just too large for the JSE. With a market cap of around R1.4-trillion it accounts for 20% of the total value of the market and as much as 16% of daily trade. It means that whatever happens to Naspers on any particular day largely determines whether the JSE goes up or down.
Of course what happens to Naspers is code for what happens to Tencent and in many cases this is code for what is happening within the Chinese government. That situation creates its own set of challenges.
Because of the technical way the various indices are compiled, Naspers is even more dominant in the crucial JSE all share shareholder weighted index (Swix). According to the company’s presentation on Monday, Naspers accounts for 35% of this index. Few index tracking funds are prepared (or allowed) to match this heady level of exposure and so tend to be “underweight” in Naspers.
Then there are the global investment funds that are precluded from investing in emerging markets and so do not have access to one of the world’s most attractive IT stocks. And let’s not forget the investors who prefer to avoid rand volatility and political risk.
One solution, first suggested a few years ago, when Naspers shareholders were still adjusting to becoming millionaires overnight, was elegantly simple – unbundle the Tencent stake to shareholders.
The Naspers board, headed by Koos Bekker, was not persuaded by this opportunistic proposal. At the time, Naspers denied there were any agreements in place that would prevent it from disposing of all or part of its Tencent stake. Despite the denial, rumours persist that the parties controlling Tencent have informally restricted Naspers’s ability to do what it likes with the stake.
Shortly after an audacious but ultimately unsuccessful bid for control launched by PSG’s Jannie Mouton in 2005, Bekker moved quickly to secure and justify the existence of Naspers’s high-voting A shares.
The A shares, which are each entitled to 1,000 votes, ensure that an unassailable 66% control of Naspers remains in the hands of Bekker, long-term director Cobus Stofberg and Sanlam. Bekker said the control structure was justified on the grounds that parties it invested in wanted to be sure who the controlling shareholders were. This would certainly have been the case with Tencent, which is extremely valuable to the Chinese state.
And so with the nuclear option of full disposal never likely to get onto the table, the Naspers board had to devise a plan that would deal with investors’ growing disquiet. It had to be a plan that would be acceptable to the SA Reserve Bank as well as the JSE, and presumably Tencent.
This week’s announcement seems to tick most of the boxes. A new company is being created (NewCo for now), which will hold all of Naspers’s international assets, including Tencent, and will be listed on Euronext in Amsterdam.
Naspers will hold on to 75% of the shares in NewCo and existing Naspers shareholders will receive a proportionate number of NewCo shares. NewCo will have a secondary listing on the JSE to enable Naspers’s SA shareholders to trade in their new shares.
Having spent 18 months trying to work out how to reduce – or, even better, eliminate – the $35bn-plus discount Naspers trades at, CEO Bob van Dijk might have hoped for a more enthusiastic response from investors. In the hours following the announcement, the share price faffed around a bit before closing 1.6% weaker on the day. That may have been a good sign as Tencent closed even weaker in Europe.
JSE CEO Nicky Newton-King said she is not concerned about the possibility of losing trade when NewCo is listed on Euronext before the end of the year. She says a company has to do what is right for itself and its shareholders, and believes the end of Naspers’s dominance could lift trading on the JSE.
Sasfin’s David Shapiro is not as upbeat. He sees the move as the loss of yet another big JSE hitter and believes most of the R25bn current daily Naspers trade will disappear and not be replaced.
As for the removal of the discount, the prospect of buying into a holding company (NewCo) controlled by another holding company (Naspers) that is in turn tightly controlled by a private company might not stir up too much excitement, particularly for shareholders who are primarily interested in Tencent and aren’t too keen about NewCo being used to build up other IT businesses.
Perhaps Cadiz’s Razeen Dinath sums it up best when he describes the proposal as a positive step “but not quite large enough to significantly narrow the discount at this point”. Dinath says Naspers does have the option to distribute more in the future “which could be used to reduce the Swix weighting”.