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Naspers hopes two discounts are less than one

The tech and media firm is persistently valued at less than its stake in Tencent.
 

Naspers hopes a discount divided is a discount diminished. The South African firm is persistently valued at less than its stake in Tencent. Shifting its shares in the Chinese internet giant to a listed subsidiary in Amsterdam won’t make the gap disappear, but may justify the cost of the reshuffle.

As corporate headaches go, chief executive Bob van Dijk’s is in the nice-to-have category. Naspers bought a third of Tencent in 2001 for just $36 million. Its stake is now worth $135 billion.

This breakneck ascent lifted Naspers’ value to the point where it accounted for nearly a quarter of the Johannesburg bourse. Domestic shareholders were forced to sell to avoid breaching regulatory limits. Meanwhile, South Africa’s volatile currency has scared off global tech investors. As a result, Naspers trades at a big discount to the value of its Tencent shareholding. In early 2018 the gap reached almost 36%.

Van Dijk’s proposed solution is to shift the Tencent stake – plus holdings in ventures like Russia’s mail.ru and Indian food-delivery group Swiggy – into an Amsterdam-listed subsidiary. Naspers investors can swap their shares for up to 27% of the subsidiary.

A shortage of European tech titans should ensure healthy demand for Prosus, as the new company will be known. The spinoff – whose name is Latin for “forward” – could become Amsterdam’s third-largest firm, behind Royal Dutch Shell and Unilever .

Prosus will probably still be worth less than its Tencent stake, though. Other companies that invest in technology trade at a discount of 10%-20% to the underlying assets. Naspers will hold super-voting shares in the subsidiary, further denting its valuation.

The trickier question is what happens to the value of Naspers. It will own at least 73% of Prosus, so will still be a behemoth in its home market. And it will still suffer from a sort of holding company discount.

Say Prosus trades at a 15% discount to the Tencent shareholding, and Naspers in turn is worth 5% less than the market value of its stake in Prosus. Van Dijk will then have reduced the overall gap to 18%, according to a Reuters Breakingviews calculator. That compares to a 29% discount before Naspers unveiled its plans on March 24.

But if Prosus is worth 20% less than its Tencent shares, and Naspers trades 15% below the value of its stake in the Amsterdam subsidiary, the overall discount will be no different – in percentage terms – than when van Dijk started the exercise. To merit the reshuffle, two discounts will have to be less than one.

Context news 

South Africa’s Naspers will float its e-commerce ventures in a separate holding company on Amsterdam’s Euronext stock exchange in September in an attempt to address a hefty discount to the value of its investments.

Naspers owns 31.1% of Tencent, after buying a third of the Chinese internet giant in 2001 for $36 million. The holding is worth $135 billion, based on Tencent’s closing share price on July 12.

Naspers shares closed at R3 406 on July 12, valuing the company at $106 billion.

The views expressed in this column belong to its authors. 

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It would help the Naspers share price if its core business was making a profit and its Tencent profits were not masking this.

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