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‘Stop the Naspers value destruction’

Swiss-based fund manager’s calls for unbundling of Tencent.

Albert Saporta, a director of Geneva-based investment advisory firm AIM&R has written an open letter to Naspers CEO Bob van Dijk accusing him of destroying R334 billion of shareholder value since his appointment more than three years ago.

Saporta says AIM&R is a shareholder in Naspers but would not disclose the size of its stake. The value destruction he refers to, is allegedly situated in Naspers’ investments and business excluding Tencent, and is apparent if its investment in Tencent is stripped out.

Saporta writes to Van Dijk: “Since your appointment at the helm of Naspers, the value of the Tencent stake relative to Naspers’ market capitalisation has grown from 90% to 130% today and seems to accelerate. Correspondingly, as implied by the market, the value of Naspers’ dozens of other investments and businesses has declined from a value of R34 billion to negative R300 billion. This can be simply calculated by subtracting the value of the Tencent stake from Naspers’ market capitalisation. In other words, in the last three years, R334 billion of shareholder value has been destroyed.”

He calls for Tencent to be unbundled to Naspers shareholders.

Naspers head of investor relations Meloy Horn told Moneyweb that nobody at Naspers had received the letter. She said Naspers views Tencent as an appreciating asset and has no plans to sell or unbundle its stake.

Who is Saporta?

According to Bloomberg, Saporta is the former head of research at Makor Capital Ltd, Research Division. He was a founding partner at AIM&R with 30 years’ experience in global financial markets, with the last 21 years as a hedge fund manager. Saporta sold his research and hedge fund management businesses of AIM&R to ABN Amro in March 2006, Bloomberg states.

In his letter Saporta refers Van Dijk to a similar letter he addressed to the chairman and CEO of ASM International six years ago on the subject of value destruction. “My letter started a campaign which resulted in ASM International selling off most of its stake in ASM Pacific to the benefit of all shareholders,” Saporta wrote.

He told Moneyweb on Sunday that he will be lobbying other Naspers shareholders and hopes the letter can start a review process that will lead to a contraction of the discount at which Naspers is currently trading. 

CEO compensation

In his letter Saporta says it is “particularly unacceptable” that Van Dijk’s own compensation is based on a share option plan that rewards him for an increase in Naspers’ share price “for which you are absolutely not responsible”. Saporta alleges that part of Van Dijk’s remuneration is based on share appreciation rights for his portfolio companies. “However, this incentive may only have an impact when all of these various holdings are effectively monetised. Until then, the process of calculating the value of Naspers’ unlisted businesses is not fully transparent.”

Saporta argues that investors in Naspers are being doubly punished, firstly because a direct investment in Tencent would have earned them a 35% return, as opposed to the 24% Naspers delivered and secondly because the other Naspers businesses “are being implicitly and constantly devalued to the point of reaching a significant negative value”.

He illustrates the alleged value destruction with the following graph:

Saporta calls on Van Dijk to exercise his fiduciary duty to increase shareholder value and proposes a re-alignment of Van Dijk’s remuneration with the performance of the non-listed ex-Tencent business and total transparency on the internal value calculations for that business.

Inefficiency

He calls Naspers an “inefficient” entry point into Tencent. “Tencent’s value in Naspers has just become too large. Investment companies regularly sell at discounts to net asset values. However, in the case of Naspers, the problem is exacerbated by the fact that one trades in Johannesburg, while its overwhelming value trades in Hong Kong. Both represent widely different pools of investors.”

He proposes that Van Dijk consider the spin-off of Tencent to Naspers shareholders. “An investor buying R10 000-worth of Naspers at the beginning of 2015 would have R16 500 today. He would have R27 000 had he been invested directly in Tencent. By continuing to hold on to Tencent’s stake passively, you are not creating any added value for shareholders. To the contrary,” he argues and makes a detailed proposal how such a spin-off could be implemented.

Saporta calls for Naspers to become a more active investor after such unbundling and concludes: “The way the Naspers discount has been building up and how value is being implicitly destroyed at Naspers is unbearable. I call on you and the board to put a stop to this and clearly state as a company objective that you are seeking convergence between the net asset value and the market value of the company, as well as aligning your compensation with this goal.”

According to the Naspers 2016 Annual Integrated Report Van Dijk’s emoluments totalled $1.67 million for the period. 

Naspers responds

Horn told Moneyweb that Naspers’ takes issue with Saporta’s “incorrect and myopic way of displaying the massive value creation for our shareholders.” She said there also seems to be some disconnect between his shorter-term expectations and the longer-term timeframe it takes to build successful platform business.

“A discount to our sum-of-parts valuation is unavoidable given some of our underlying investments in listed entities (this is typically referred to as a “holding company discount”). We also recognise that the market is not attributing full value to our core business at this stage given the stage of development of some businesses, but our strategy is to focus on scaling these businesses and driving profitability and meaningful cash generation. This will become difficult for the market to ignore and should thus rectify the discount over time.”  

Read the open letter here: Naspers letter

 

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COMMENTS   24

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I am neither a shareholder in naspers nor tencent BUT tencent is next on my buy list. if I were a naspers shareholder I would be very unhappy with the situation which clearly is driven by naspers management wish to hide local poor results and no doubt increase their bonuses by including tencent in their results. does not show management in good light. so again why buy local when you can get the real thing by investing off shore?

Agree Rob. The Broederbond is strong with this one.

I am certain the Tencent board sits around anxiously waiting for pearls of wisdom and detailed instructions from the genius that is the Naspers executive.

The swiss guy is correct, but he forgets that unbundling would mean the entire HO structure and executive of naspers being proven pointless. Ag shame man, waar sal hulle weer sulke lekker werk kry?

Johan they won’t need to work. They have made a bundle.

They have hundreds of people working for them thinking that they are part of a great organanisation.

The shock may be too great once Tencent is removed.

When Amazon/Tesla/Netflix etc invest for the long term they are praised, when Naspers does it they get crucified. Fact is, Naspers has matched Amazon share price performance in dollars since 2000. If you don’t like what they are doing, sell the shares and go buy Tencent directly, it really isn’t that difficult.

Selling is an option. However, is there anything wrong with an active shareholder asking questions? The author of the letter is within his rights to raise issues and demand answers from management. There are different approaches to participating as a shareholder.

Naspers made this investment in Tencent while TENCENT was a nobody and was shunned by these same thugs moonlighting as “Asset/investment” managers who have never built a business. If he is unhappy sell & buy tencent.

The difference is that Amazon, Tesla and Netflix are modern and efficient organisations.

Naspers is a gigantic bubble of dead wood that is being propped up by Tencent income.

I would praise Naspers if they saw the real situation and cut their losses in all areas other than Tencent.

But there are too many buddies keeping each other going as a charity organisation there.

@TheSpark All I read in your reply is a bunch of opinions, no facts. Tesla yet to turn a profit, Netflix lost money for years. How do you measure their efficiency vs Naspers? What is the “dead wood” you are referring to? What is a “gigantic bubble”?

You are clearly very emotional when you speak about Naspers.

@louisk Naspers sans Tencent is currently haemorraging money. They have been for years. Stock pundits are throwing money at the Naspers share based purely on Tencent revenue. If you have worked for any of their subsidiaries, then you know how much dead wood there really is.

Are Tesla and Netflix not modern and efficient organisations? Are they not growing?

What do you suppose would happen to the Naspers share if Tencent were removed?

What do you suppose would happen to Naspers’ entire group if they did not have their shareholding in Tencent?

TheSpark, interested to know why you are so negative about Naspers? Sure, Tencent is a valuable revenue spinner for them, but they do have an extensive range of investments that extend into media, entertainment, news, online shopping etc…

You mention that you worked for a subsidiary.. May I ask if it was a locally domiciled subsidiary? Perhaps that would explain your statement on certain subsidiaries being “dead wood”.

Investors are free to buy the shares they want and are not obliged to hold those not wanted.
If you don’t like the way an instrument is being managed, you don’t have to have shares in it.

Shareholders have the right to hold the management accountable in various ways. It is not just a matter of selling the shares when unhappy. Active shareholders/investors have the right to ask questions and management must explain themselves. Selling is one of the measures of last resort.

The letter makes a valid argument which deserves a satisfactory response. The author is acting within his rights as an (active) investor.

Ok what are you trying to say? I own a corner cafe. I appoint managers. The managers dont do a good job. Are you saying I must sell the cafe. No ways. I am going to fire the manager and get someone to do a proper job. Sell my cafe/shares? What planet are you from? The question here is whether bob is doing a good job? The arguments the swiss guy makes indicates that bobby is not on top of his game and he better start performing. All he does is come to work to watch the tencent share price, or should I say hide behind tencent. Thats not good enough. Bye Bye bobby

Naspers is in the business of taking ‘gambles’ in many of these start-up tech companies, some pay-off, some don’t, that’s what they do.
So correct me if I’m wrong, but essentially, what this bloke is saying, is that, Naspers should get rid of the one company, THEE gamble, that has payed off the most, because he says so ?

Sounds like absolute madness to me !
He makes valid points here and there, perhaps a few shareholders will read his letter and re-consider their options, but even he must realize that this request is a step too far, because It might called be called TenCent , but it sure has made many shareholders more than ten cents, whether directly or through Naspers.

My two cents of contribution is that Naspers should list the other businesses separately, especially Multichoice. That way the market can price them more accurately.

And the market will show which ones should be culled

Naspers has bought low, now sell high, take the money and run. Send that Swiss guy a magazine subscription to say thank you for. Learn the lesson from the PayTV business that you can only squeeze out so much blood before the business model starts dying.

I’ve been saying this for about 5 years.

Naspers is nothing without Tencent.

Once Tencent is removed you’ll see that Naspers is a dying organisation in its last throes.

I think, you sell ”Nasionale Pers’, at your peril!

What is commendable more than anything about this letter is that it is clear and direct…

The sad part about it all esp for SA investors and citizens is that the company that is holding JSE together currently.. 20% of JSE market capitalisation… is not what they had hoped it is.. NASPERS as a stock is not as attractive as we might like..

Should it unbundle, NASPERS will probably loose 50% of its current value if not more.. Is this a good thing for JSE or for SA or for shareholders?

If NASPERS has adopted a business model of unlocking value out of tech start-ups or any start-ups … should it then be crucified for milking the cow?

A satisfactory response will be a letter or comments that actually brings solutions to the fore.. not just criticisms of NASPERS, its model and/or the CEO..

Audi alteram partem ..Both sides must be heard.

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