In a move that is without precedent in South African corporate history, 36 asset managers have sent a strongly worded letter to the boards of Naspers and Prosus highlighting their concerns about the proposed share exchange between the two companies and the long-standing misalignment of the executive compensation system.
The asset managers, which include Naspers’s single largest shareholder the Public Investment Corporation (PIC), represent total assets under management of more than R3.6 trillion.
Significantly, three of South Africa’s largest asset managers – Allan Gray, Coronation and Ninety One (formerly Investec Asset Management) – have not signed the letter.
It should be noted that Ninety One CEO Hendrik du Toit is a member of the Naspers board.
|Asset Managers and Investors who co-signed the Letter|
|36ONE Asset Management|
|Aeon Investment Management|
|All Weather Capital|
|Aluwani Capital Partners|
|Benguela Global Fund Managers|
|Counterpoint Asset Management|
|Fidelity International Limited|
|First Avenue Investment Limited|
|Granate Asset Management|
|Kagiso Asset Management|
|Melville Douglas Investment Management|
|Momentum Outcome Solutions|
|Nedbank Private Wealth|
|Optimum Investment Group|
|Perpetua Investment Managers|
|Perspective Investment Management|
|Public Investment Corporation|
|Prudential Investment Managers|
|Truffle Asset Management|
|Vunani Fund Managers|
The proposed share swap represents another attempt by Naspers/Prosus management to reduce the yawning discount between the value of the Naspers/Prosus shares and the underlying value of its key investment, Tencent.
The proposal has met with widespread criticism since it was announced last month, with analysts and investment managers stating that it will add to the complexity of the control structure without achieving any reduction in the discount.
In the weeks after the deal was announced Naspers/Prosus CEO Bob van Dijk told the media that the more they interact with the shareholder base, the more support they are getting.
This week’s letter, sent to the board members on Wednesday evening, suggests that support is at best patchy.
The unprecedented move by the asset managers may be nothing more than a huge embarrassment for the Naspers/Prosus boards given the control structure involved. Unlisted entities control Naspers through high-voting A shares; Naspers in turn controls Prosus through its current 72.5% holding.
The unlisted entities at the top of the structure are controlled by Naspers chair Koos Bekker, non-executive director Cobus Stofberg and Sanlam, among others.
In the letter, addressed to Bekker and Ninety One’s Du Toit, the asset managers say they find several aspects of the proposed transaction problematic.
“We are of the view that it introduces elements which serve to increase complexity in the overall company structures, thereby reducing the likelihood of further value unlock, whether immediate or longer-term.”
The asset managers say they took the unprecedented step of going public with their concerns because, after communicating with the executive management team, they have not been given a clear understanding of how their views have been interpreted.
According to the asset managers, the introduction of cross-shareholdings between the two companies will inhibit subsequent corporate restructuring and defer the potential unlock of trapped value. “It would be unique for this instance to result in the opposite,” they say.
Their letter also raises the long-running concern of the misalignment of management incentives, which they believe could result in the discount widening further after the proposed transaction.
“We reiterate previous concerns raised individually, that the management incentives in Prosus are dominated by the performance of Tencent and are not sufficiently connected to the unlisted companies within Prosus.
“This reduces alignment between management’s decisions in respect of the unlisted components and how their own capital allocation decisions are ultimately accounted for and assessed,” say the asset managers.
To be more specific …
Shane Watkins, chief investment officer of one of the signatories, All Weather Capital, told Moneyweb on Thursday morning that it must be placed on record that they do not agree with Naspers/Prosus management’s assertion that they have created significant value in the recent past – especially as it relates to the performance of Van Dijk, who has been paid hundreds of millions of rands.
“The truth is that he has made some value-destructive decisions, the most material being the sale of the stake in Allegro [which was sold for $3.2 billion, and on listing had an implied valuation of $21 billion], the first sale of Tencent shares at HK$405 versus the current price of over HK$600 [around US$5 billion left on the table), and of course the discount in Naspers has actually widened since the listing of Prosus,” said Watkins.
He added that 100% of the value created has been through an uplift in the Tencent price – “where Bob [Van Dijk] has no participation or input whatsoever”.
“Against this background we find his arrogance and dismissive attitude towards us stupefying.”