Naspers-Prosus share swap scheme may just be a step in the right direction
Solving the problem of the Naspers share discount is one that has kept teams of lawyers, actuaries and accountants gainfully employed for months, if not years. A new scheme will see the size of Naspers materially reduced on the JSE and may just be a step in the right direction.
Judging from the share price reaction, Naspers and Prosus shareholders don’t know quite what to think about the elaborate scheme that invites Naspers shareholders to swap their Naspers shares for Prosus shares.
The price of the companies’ shares rose just 3.1% and 2.7%, respectively, as news of the offer broke on Wednesday morning.
This is the latest in a long line of attempts to reduce, in particular, the Naspers share-price discount to the value of its internet-heavy portfolio of assets. At this point, Naspers is trading at a massive 50% discount to its value, while Prosus trades at about 30%.
A discount of 20% to 25% is considered acceptable for holding companies: 50% is a headache for management and investors alike.
In terms of the offer, Naspers shareholders will be invited to tender their ordinary Naspers N shares for newly issued Prosus ordinary shares. If the proposed transaction is fully taken up by Naspers shareholders, it is expected that Naspers’ holding of issued Prosus Ordinary Shares N will reduce from 73.2% to 57.2% post-implementation, and that Prosus will hold 49% of the issued Naspers N Ordinary Shares, providing it with a 49.5% economic interest in Naspers.
Due to the cross-holding in Naspers by Prosus, the effective economic interest of the Prosus free float in the underlying Prosus portfolio is expected to more than double to 59.7% or $100-billion.
This pushes the company into the Top 20 STOXX 50, hopefully attracting further inflows and greater liquidity.
By the same measure, Naspers will reduce in value by $50-billion, reducing its weighting on the All Share Index from 23% to 14%, says CEO Bob van Dijk. This removes the perennial problem of Naspers’ outsize weight on the JSE, he says.
“There is a strong correlation between Naspers’ size relative to JSE and the discount, because it limits the forced selling that limits share price appreciation.”
At the same time, Naspers will remain domiciled in South Africa as the JSE’s largest listed company and will retain control of Prosus.
Solving the problem of the Naspers discount is an ongoing one. In September 2019 the firm unbundled its internet stocks – including classifieds, food delivery, fintech, payments and online education, as well as its stake in Chinese media company Tencent, into Prosus (in which it retained a controlling stake), and listed on Euronext Amsterdam, creating Europe’s largest listed consumer internet company.
“This was designed to reduce the weight of Naspers on the JSE, and in the process narrow the discount,” says CFO Basil Sgourdos.
It worked for a while. But then shares in Naspers climbed by 30% in 2020, supported by Prosus’ 28.9% stake in Tencent (it sold 2% in April). As a result, Naspers’ weight has risen on the JSE and the discount is at its widest point ever.
In October 2020, Prosus announced it planned to buy back $1.37-billion worth of Prosus shares and $3.63-billion worth of Naspers shares – a process that has probably increased value for shareholders but has yet to reduce the discount.
“I think the offer is neutral to slightly positive for shareholders of both Naspers and Prosus,” says Peter Armitage, CEO of Anchor Capital. “But in the long run, I question whether it addresses the problem of how to unlock the underlying economic value within Naspers.”
Reducing Naspers’ discount requires a multipronged approach, says Sgourdos. “We are solving one known reason for the discount – Naspers’ size on the JSE. To get back to 24% of the All Share, we would have to add another $200-billion of value, so we believe this is a sustainable solution that creates value for both Naspers and Prosus shareholders.”
Paul Theron, director of private client asset management firm Vestact, was less certain. This deal, he commented, looks a bit like “two snakes which are eating each other from the rear”. The problem with the offer, as with the entire cross-shareholding structure of Naspers and Prosus, is that it is inordinately complex, he says.
“If this works, Naspers gets smaller. We will see if the local institution concentration limit issue is really what has been holding the Naspers share price back.”
The proposed transaction has already been approved by the South African Reserve Bank but requires the approval of Prosus shareholders. It is expected to be concluded by the third quarter of this year. BM/DM