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Prosus offer to Naspers ‘idiotic’ – Saporta

It is evident he does not understand all the considerations – Van Dijk
Bob van Dijk, CEO of Naspers and Prosus: ‘While the execution steps seem complex, the end state is not.’ Image: Yuriko Nakao, Bloomberg

A Swiss-based research and investment management firm, Alternative Investment Management & Research (AIM&R), says the proposed share swap between Naspers and Prosus is an “idiotic idea” that is certain to increase the discount between the share prices and the value of the underlying assets.

Naspers rejected AIM&R’s views. Naspers CEO Bob van Dijk said it is evident that the Swiss firm does not understand all the considerations, and that the firm never engaged Naspers directly to discuss the issues.

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AIM&Rs views were articulated in an open letter penned by AIM&R director Albert Saporta, which was sent to Moneyweb, Bloomberg, Financial Times and The Wall Street Journal. In the letter, Saporta states that in his “35-year career of analysing, investing and restructuring in global holding companies, I have never ever seen a situation where a holding company would create another layer of complication in order to reduce a discount.”

“It makes no sense whatsoever. Indeed, holding companies that actively want to durably reduce a discount simplify structures rather than complicate them, usually through major asset spin-offs and major share buybacks, something that Naspers has never done,” says Saporta.

Saporta has previously criticised Naspers for not doing enough to unlock value for shareholders. It is important to him – AIM&R uses an event-driven investment strategy that relies on corporate events to unlock value for investors.

‘Two-headed monster’

“However, not content [in] having created a 2-layer pyramidal structure into Tencent, you are now proposing an even more idiotic idea, and that is for Prosus to tender for Naspers’ shares.

“If this tender is successful, you will create a two-headed monster of a corporate structure where Prosus owns Naspers and Naspers owns Prosus, in a cross-shareholding structure – probably the most inefficient capital structure one can think of,” Saporta writes in his open letter.

“I can guarantee that the creation of the two-headed corporate monster, i.e. a cross-shareholding structure, will lead to a higher discount for both Prosus and Naspers post-tender, possibly the highest ever seen.

“The reasons are clear: more complication, more confusion, and less governance cannot lead to a lower discount. Only simplification and transparency work.”

Saporta offers an example of a similar company structure to prove his point – a Hong Kong group, Jardine Matheson and Jardine Strategic, that had a cross-shareholding structure: “Both sold at unusually large discounts for years, if not decades,” he says.

“Eventually and over the years, Jardine Matheson increased its ownership in Jardine Strategic to eventually make a cash bid a couple months ago at an unacceptable discount,” says Saporta, alluding to the fact that this might happen with Naspers as well.

“This would not only obviously rip-off Naspers’ shareholders, but it would in the end transfer the discount problem from South Africa to the Netherlands,” he says.

‘Unfair’ offer

Saporta also argues that the offer of 2.27 Prosus shares for every Naspers share is unfair.

He calculates that Naspers is trading on a 54% discount to net asset value (NAV) compared to Prosus trading on a 39% discount. “Why would anyone want to sell out of Naspers on such a high discount differential with Prosus for ownership of basically the same assets?”

He says arguments that a Dutch holding company will trade at a lower discount due to higher liquidity are flawed.

“The underlying assets are essentially the same and therefore there is no reason why the discounts should be widely different. Both shares are extremely liquid, and since Prosus’ IPO [inital public offering], Naspers has been actually more liquid than Prosus.”

Saporta wants Naspers shareholders to reject the offer or, at least, hold out for a better offer. “A discount neutral tender offer implies 2.75 Prosus per Naspers.”

End result simple

Van Dijk, who is CEO of both Naspers and Prosus, rejects these arguments.

“It is evident from the letter that they do not understand all the considerations,” Van Dijk told Moneyweb in an exclusive interview, adding that AIM&R never engaged with Naspers directly to discuss issues.

“The choice is straightforward. We can do nothing and continue to watch Naspers’s weighting continue to climb on the SWIX from its already unprecedented 23% to much higher levels, or bring it down to 14%.

“If there was a better way to achieve this and still secure all the necessary approvals, that better way would have been on the table. We have spent a year on this and unpacked all the options,” says Van Dijk.

He admits that the process seems complicated and that the technicalities aren’t simple.

“While the execution steps seem complex, the end state is not. We have an Amsterdam-listed European consumer internet leader and a Top 20 Euro Stoxx 50 company and one of the fastest growing internet groups. It will be owned 60% via Amsterdam and 40% via the JSE.

“Amsterdam shareholders get their full 60% share of any distribution from Prosus directly and JSE shareholders will also get their 40% as Naspers onward distributes to them.

“There is nothing complicated about that nor any significant added risks,” says Van Dijk.

He explains that SA policies with regards to locally domiciled international groups are clear. “When we were thinking about a solution, we knew what the regulations and policies were. We worked within these parameters.”

The most important is that Naspers remains domiciled in SA and would still be a South African taxpayer, as Naspers explained in several announcements following the announcement of the proposal some two weeks ago.

Prosus will increase in stature on the JSE and in Amsterdam with a larger free float of Prosus shares by issuing new shares as consideration. The Naspers free-float will decrease significantly, as will its weight in JSE indices. The 45% shares to be held by Prosus would not count towards calculating its weight in JSE indices.

Van Dijk says that AIM&R is simply wrong in its argument that the offer ratio is detrimental to Naspers shareholders.

“They argue that the market has been wrong for ever. In fact, the ratio that the shares have been trading [at] since the listing of Prosus is around 2.03 Prosus to Naspers,” says Van Dijk.

He noted in the interview that management has had a lot of discussions with fund managers and analysts since the announcement. “We have been working on this many months and have a head start on understanding it. The discussions have been helpful. We explained and we listened,” says Van Dijk.

Tencent unbundling

AIM&R also argues that the only way to unlock value is for Naspers and Prosus to unbundle the majority of its Tencent stake, keeping only enough to fund the development of its newer ventures.

“Allow me a cheeky answer to that,” says Van Dijk. “Unbundling was first mentioned in 2005 when the Naspers stake was worth a few billion, and again in 2015. Today we are glad we said no.”

He mentions several compelling fundamental reasons to keep Tencent.

“China is by far the largest [market] in the internet world, with 1.3 billion internet users. Second is India with around 500 million and third is the US with 340 million.

“Tencent has a great leadership team and its prospects remain excellent.

“We have learned a lot from Tencent and it gives us insight into the Chinese market to grow our other interests there. It also benefits the growth of our businesses in other countries,,” says Van Dijk.

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“The global interests in Naspers, especially Tencent, are beneficial for SA shareholders. Fund managers can invest 30% offshore. Naspers gives investors the opportunity to invest in a huge international internet stock and one of the biggest companies in China, on the JSE with local funds.

“Lastly, unbundling Tencent will create a big overhang of shares in the market that will be good for nobody,” says Van Dijk.

Van Dijk says there were other ideas, some of which were not in accordance with the regulatory framework. Others were fair to one set of shareholders but not the other.

“This is the best solution. It creates immediate value for shareholders and ongoing potential for growth, while Naspers remains the largest SA-domiciled company on the JSE.”

Naspers and Prosus

 

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COMMENTS   17

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Shades of Resilient and Fortress shenanigans.

Just shoot them now.

“This would not only obviously rip-off Naspers’ shareholders, but it would in the end transfer the discount problem from South Africa to the Netherlands,”
Enough said.

Naspers owning Prosus and Prosus owning Naspers. Takes me back to the pre 1994 corporate arrangements including “pyramids” (not to be confused with pyramids in the context of ponzi schemes) which had capital trapped in an isolated economy circulating incestuously. Some normalisation and relief came about as a result of “unbundling” initiatives.

They are at some point going to have to unbundle the Tencent stake and I think they know that. I see these moves as manoeuvres to buy time so that they can use the dividends (and 2% sales of their stake) to fund other businesses that are in their development stage (and still losing money).

a story behind a story behind another story . makes sense placing Prosus os out of grubby azanian paws . maybe this crossownership will justify more fees for directors ala Remgro with it’s holding system ?

All this share crossholding gobbledygook – is this another Steinhoff in the making?

Steinhoff was huge debt + lies… I think it’s different

Used to own the stock and at first things were ok, but this year you could see the patches and cracks.
You have the management that love money for themselves, not the company or shareholders. They also “missed 2 opportunities” now and has really done nothing else with the company. Apparently they flushed with cash, but then they sold 2% of tencent (surprise) to bolster their money coffers. Really??
Something is not right with this company and now even independent analysis are pointing out the crack, confusion and directionless company

Wow

“Unbundling was first mentioned in 2005 when the Naspers stake was worth a few billion, and again in 2015. Today we are glad we said no.”

Yes I am dead sure you and the hired help are very glad it rocket fueled your wages into billions. Yes with a b. For doing NOTHING in TenCent except watch the share certificate.

Borrowing from the Swiss : it is IDIOTIC to quote the discounted increase in value at group level as a cheeky justification for why it was better than unbundling.

– same CEO in the two entities is not fair to shareholders
– big share buy- back is an excellent suggestion
– decent dividend to shareholders will mollify a lot of criticism
– purchasing Tencent directly Offshore ( even in Offshore Asset swop) is good alternative
– Celebrate the decision to buy Naspers in the first place
– be aware that the value of your investment is actually controlled by the communist Chinese government so anything can happen at any time and it will be beyond the control of the local CEO!
Good luck!

We all know that the reason this remains complex is because Tencent is in China and investing there, as an outsider is complicated. Unbundling other stakes in the Prosus Naspers stake is easy and will expose a lot of them (Media24) but it must be done.

Ambiguity is good for asset and tax shuffling, no?

Naspers has always been about dodgy dealings and smoke and mirrors.

Just me… Or does it seem like both sides of this debate have vested interests they’re not being transparent about??

I don’t believe Naspers is being forthright… But AIM is clearly acting on their own agenda too.

Pity the shareholders in the middle.

Ditto to many other comments above √

Such a ludicrous attempt of cross-holdings within clumsy structures, just REINFORCES the notion that “Naspers is a ONE-TRICK PONY” after all.

It’s as if Naspers (along with Prosus) have nothing left in their arsenal for shareholders….except a once-off lucky strike two decades ago acquiring Tencent.

Without Tencent, Naspers today would’ve been a penny stock…

as the Dutch would say: hebben is hebben, krijgen is de kunst.

Watch this share fall… in days to come!
Trend is negative.

I think Mr Saporta understands exactly what the impact is and Mr Van Dijk does not.

In fairness, the business is run for shareholders. Sadly, it is for A shareholders, not N.

End of comments.

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