News that Prosus was selling off another 2% of Tencent saw both Prosus and Naspers shares take a hit on Wednesday morning, indicating that investors were nervous about what the Prosus board might do with the cash injection of around $15 billion.
On Wednesday Prosus told shareholders it would use the proceeds of the sale “to increase its financial flexibility to invest in growth, plus for general corporate purposes”.
Prosus chair Koos Bekker said: “Tencent is one of the world’s best growth enterprises. It has consistently delivered value since listing in 2004. Prosus’s commitment to Tencent remains steadfast. Through the sale of this small portion, Prosus intends to fund continued growth in our core business lines and emerging sectors, as well as allow for complementary acquisitions.”
Prosus has undertaken not to sell any more Tencent shares until March 2024.
The slump in the Prosus and Naspers share prices indicates investors’ fear that nothing Prosus does with the money would compensate for the loss of part of the Tencent stake.
Jean Pierre Verster of Protea Capital Management however said that in the context of the Prosus/Naspers share repurchase strategy, the sale of 191.9 million Tencent shares made sense.
“Prosus and Naspers have been buying back their own shares at hefty discounts, the sale of a part of the Tencent stake at a slight discount of 5.5% to 8.7% reflects a good allocation of capital.”
Verster added that the HK$575-595 expected for each Tencent share was not far off the all-time high reached earlier this year. But he did express apprehension about what Prosus might do with its latest cash pile.
“Last time Prosus did behave as though the proceeds were burning a hole in its pocket, fortunately they maintained capital discipline in their acquisitive bid.’
Other investors were less supportive and slammed Prosus for pandering to shareholders who had taken positions in the group in the hope that management would reduce the discount at whatever long-term cost.
“Prosus and Naspers should be focused on managing the underlying businesses to generate strong sustainable free cash flows,” said one fund manager.
This is the first time since March 2018 that Prosus, the single largest shareholder, has sold any Tencent shares. At that stage Prosus committed to not selling any more Tencent shares until March 2021. The March 2018 sale generated $9.8 billion for Prosus, which managed to secure HK$405 per Tencent share.
After the March 2018 sale of a 2% stake, equivalent to 190 million Tencent shares, Prosus went on a global search for assets it hoped would help to reduce the hefty discount between its share price and the value of its Tencent holding. During its asset search Prosus made a $6.3 billion bid – ultimately unsuccessful – for UK food delivery group Just Eat. A rival bidder, Takeaway, prevailed in that transaction.
One analyst remarked on Wednesday that the latest proceeds from the sale of the Tencent shares would be sufficient to make a bid for the combined Just Eat/Takeaway business.
The Tencent share price has recently been under pressure in part because of expectations that Prosus would be unloading another 2% after the March 2021 deadline. In addition, rising US Treasury yields and signs of a more aggressive stance by the Chinese government towards the country’s powerful technology companies have undermined investor sentiment.
Read: Tencent faces broad China clampdown, Naspers shares hit (Mar 12)