The board of Prosus intends to buy back up to $5-billion of its own as well as holding company Naspers’ shares.

It plans to acquire up to $1.37-billion worth of shares from its free-float shareholders and up to $3.63-billion worth of Naspers shares “on-market”.  

This is by far the largest share buy-back in JSE history, and once complete will account for 4% of Naspers market capitalisation and 4% of Prosus’ free-float.

The buy-back also comes on the heels of Naspers’ R22.4-billion share buy-back, completed in April this year.

This transaction is subject to shareholder approval and the process will begin after the release of Prosus’ results for the six months ended 30 September 2020, on or around 23 November 2020.

Prosus is cash-flush, with a war chest of some $10-billion, $4.5-billion of which is cash – a considerable sum considering the holding cost of cash in Europe is negative.

“Over the years, our group has achieved improved financial flexibility. It has built a portfolio of e-commerce assets with significant cash flow-generating capabilities,” says Basil Sgourdos, CFO of Prosus and Naspers. 

“The group is now in a position to both invest in its asset portfolio, and to purchase its own stock when it makes sense from a returns perspective.” 

The announcement marks another step in Prosus’ continuing effort to create shareholder value and reduce the current discount of the share price to Prosus’ net asset value (NAV) over time. 

Prosus is active in the acquisition space, investing over $865-million into companies, mostly in India and other Southeast Asian countries, in the 2020 financial year. These acquisitions were into its chosen areas of payments, online education, food delivery, an online marketplace for SMEs and a technology platform providing transport solutions in India.

None of these were “move the needle” acquisitions, however. In late 2019 its $6-billion offer for Just Eat was trumped by a rival, while its efforts to acquire eBay’s Classifieds business came to nothing when eBay decided it wanted to retain a stake in the business.

Since then the price of technology assets has multiplied exponentially, driven higher by increased consumer demand for e-commerce services, thanks to the global Covid-19 lockdown, and the rise in the valuation of companies such as Amazon, Apple and Google.

“We have found several large M&A opportunities in our sector to be fully priced and have stayed disciplined,” says Bob van Dijk, CEO Prosus and Naspers. “Utilising cash to own more of our current portfolio through a purchase of our own shares – when the discount to NAV is sizeable – is a sensible use of capital.”

When it comes to capital allocation decisions, management has to allocate capital in a way that it generates returns that will beat the cost of capital. When share buy-backs achieve this goal then value is added to shareholders. 

“Management believes that the valuations of companies for sale are too high at present and that repurchasing their shares is a better use of capital than going out and expanding the business by doing acquisitions. On the basis of the discount at which the shares are trading, I would probably agree with them,” says Reuben Beelders, chief investment officer at Gryphon Asset Management.

“I recall a few years ago, when management also indicated that prices for acquisition were not offering value and they changed their strategy to grow aggressively ‘organically’. I think this was also the correct decision, so they do seem to be able to discern when prices are too high.”

Investment guru Warren Buffett, who was able to grow Berkshire Hathaway to the size it is through consistent share buy-backs, once noted that, “The best use of cash, if there is not another good use for it in business, if the stock is underpriced is a repurchase.” 

The share price of Naspers and Prosus rose 3.7% on the news. DM/BM