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Musings on the Naspers-Prosus share swap

Mike Gresty from Anchor Capital wonders whether ‘when the dust settles and we look back on this deal in the long term it may well have destroyed more value than it creates’.

SIMON BROWN: I’m chatting now with Mike Gresty, fund manager at Anchor Capital on the Naspers Prosus share swap. Mike, I appreciate the time. You had a note out around the deal, which is essentially that shareholders of Naspers are able to tender their shares for Prosus shares. The key point perhaps at the top is that for some shareholders who are holding it, individuals holding it in their private capacity, there is potentially a tax consideration. That unfortunately needs to be a part of the assessment when shareholders are considering whether or not to take a deal.

MIKE GRESTY: Good morning, Simon, and good morning to everyone listening. I think you’re exactly right. Probably the first point to note is that when Naspers itself is considering these sorts of deals, primarily they’re looking at it from an institutional investor base. I’ve heard stats that suggest probably only about 6% of Naspers shares are held in the hands of what we would call tax-sensitive private investors. So I have to say that in the decisions they take I’m not sure that necessarily the interests of that small group of investors are really paramount in their thinking. 

But for that group, this is obviously going to be a real Hobson’s choice If you like. Do you trigger the gain in order to get a slightly bigger uplift in the net asset value that underpins your investment? Certainly on my calculations for many of them, particularly those who have held their shares for a very long time and are sitting on big unrealised gains, it’s very likely that the tax that they trigger will more than offset the uplift in value that they would see by opting to do the switch.

SIMON BROWN: I want to come to that uplift in a moment. Of course, the trick with the tax is that you don’t actually realise the cash. If I had sold my Naspers shares, at least there is cash to pay that tax. But, because it’s a swap there is no cash. In essence, with the swap deal we’ll be ending up with some serious cross-holdings between Naspers and Prosus, and they own a whole lot of each other – Prosus ultimately Tencent. Truthfully, it’s bringing complexity and to my sense – and you make mention of it in your note – markets often don’t like complexity. We kind of like simple and this is really going the other way.

MIKE GRESTY: Absolutely. In my dealings, particularly with international investors, you are often running with pretty lean teams trying to cover the world. We may look at structures like this and, unless it’s extremely interesting to them, they just decide it’s not worth the squeeze and move on. My worry, frankly, is that I think Naspers’s management underestimates the negativity of putting this complexity in place. I think even the Prosus creation in the first place is highly questionable at this point – whether they created value. A lot of my calculations are based on the assumptions that Mr Market decides to put this grouping on the same sort of discounting asset value after the deal as it has been before. And there’s absolutely no assurance that that will be the case. So yes, I am very worried that when the dust settles and we look back on this deal in the long term it may well have destroyed more value than it creates.

SIMON BROWN: They’ve been doing lots of sort of shuffling chairs on the Titanic. I think you’re spot on, I’m not convinced the first Prosus deal significantly worked. You mentioned the uplift. In essence, what you’re saying is that for existing Prosus shareholders it’s about a 6% uplift for Naspers shareholders who don’t tender; for those who do tender, it’s about 9.5%. So there is a little bit of benefit there. We’ll park the CGT (capital gains tax) aside for a moment, but there is some potential – and I stress the potential – that it is perhaps worthwhile taking the offer if you are a Naspers shareholder.

MIKE GRESTY: That’s certainly the way I see it. Obviously, the big proviso is that the discounts remain exactly the same on the deal that they were before, but undoubtedly mathematically, tax matters aside, it would be the smart move to take the deal as we calculate it. 

SIMON BROWN: It almost hinges down to that tax. And of course, listeners, remember you’ve got that R40 000 a year of CGT that is free of tax. So you need to run some numbers, speak to your accountant. 

Mike Gresty, fund manager at Anchor Capital, I appreciate your early morning time. 

In our poll this morning on our social media – Twitter, LinkedIn, and Facebook – will you be swapping your Naspers shares for Prosus? For me it’s moot. I don’t hold. But your options are: Yes, I will; No I’m keeping them; or I don’t own either, which is where I sit. If I was holding them, I would run the tax numbers. And perhaps what I would do is I would swap out to the amount where I get that R40 000 CGT exclusion, and then hold the rest to keep myself safe. 

You’ll find that question and you can chat on Twitter, Facebook, and of course LinkedIn.

Listen to Thursday’s full MoneywebNOW podcast here.

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The tax CGT tax payable when switching to Prosus must be seen as a reduction of an existing tax obligation. Sooner or later that CGT will be paid whether you like it or not!

End of comments.

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