Despite widespread shareholder reservations, Prosus’s offer to issue new shares in exchange for Naspers shares received the requisite shareholder support and was effected on Monday.

The share swap sees Naspers owning a 57% majority stake in Prosus, down from 73.2%. In turn, Prosus has taken up 45.33% of the total issued share capital of Naspers.

Considering that these are the biggest and sixth-biggest companies on the JSE, the transaction had a massive, if momentary impact on the JSE, which only opened for continuous trading at 2.30pm on Wednesday.

The weighting of Naspers in the JSE’s Top 40 moved from 15% to 8%, while Prosus moved from 11.1% to 9.6%. Similarly, on the Swix40 (Shareholder Weighted Index) Naspers was downweighted from 23.4% to 11.9%. And on the capped Swix40 (where weightings are capped at 10% regardless of their market capitalisation to reduce concentration risk), Naspers downweighted from 9.50% to 4.9%, while Prosus was upweighted to 6.6% of the index, from 1.95%. 

Collectively, they now make up 11.5% of the capped Swix, up from 11.45%. 

One of the objectives of the enormously complex and costly transaction was to help to rebalance the oversized weight of Naspers on the JSE, while preserving its position as the largest South Africa-domiciled company on the exchange. In this regard, the transaction has achieved its objective. 

“We are pleased with the outcome of the Prosus voluntary share exchange offer,” said Naspers and Prosus CEO Bob van Dijk. In addition to the rebalancing, “The transaction increases the size of the Prosus free float and more than doubles its ownership of the group’s outstanding global consumer internet portfolio.” 

Van Dijk went on to say that the transaction is expected to create immediate and long-term value for Prosus and Naspers shareholders. 

On this point the jury is still out. The aim of reducing the outsized weighting of Naspers on the JSE and improving the liquidity of Prosus on the JSE and Euronext Amsterdam exchanges was to address the substantial discounts to intrinsic value at which both Naspers and Prosus trade. In the case of Naspers it was trading at about a 50% discount to NAV ahead of the transaction, while Prosus traded at a 30% discount. Initial indications are that this has not changed – if anything the discount may have widened.

“There has definitely been a lot of relative selling of Naspers and buying of Prosus,” says Claude van Cuyck, portfolio manager at Denker Capital. “The share price moves have been driven by net buying and selling as the passive funds and a few active managers rebalance their portfolios, they are not necessarily fundamental.” 

It is perhaps too early to assess whether value has been or will be created through this transaction. “This will remain a longer-term issue. I have no doubt that management is focused on long-term value creation – this is a first step… there will be more to come,” says Van Cuyck.

Mike Gresty, portfolio manager at Anchor Capital, agreed that the market noise makes it difficult to assess value creation. 

“There is a huge amount of noise being created by the index rebalancing right now, which makes any clear call as to where the market is going to settle very difficult right now. It is hard to say how long it will take the index impact to work its way out of the system.” 

However, he added that as things stand, “There has been absolutely no recognition in share prices of the uplift in NAV underpinning the two counters – they are now just trading at even larger discounts to the new NAVs than they were. All those advisory fees, securities taxes and capital gains triggered for nothing!”

By using Prosus shares, which trade at a narrower discount to their underlying net asset value, as the “currency” to buy the more deeply discounted Naspers shares, there was an uplift to the NAV underpinning the shareholdings of both Naspers and Prosus’s public shareholders, he explains.

According to his calculations, Prosus shareholders, and Naspers shareholders, who opt not to tender their shares, should have seen an increase in the NAV underpinning their holding/s of about 6%.

For Naspers shareholders who opt to tender their shares, Anchor calculated a NAV uplift underpinning their shareholding of 9.5%.

One would have expected the Naspers discount to NAV to close as the market “priced in” the increased underpin to NAV that this transaction will produce, but this has not happened. 

“The fact that the market does not seem to have priced in the NAV uplift, is tricky to interpret,” Gresty says.

It is possible that the market may be applying a further discount to NAV on both Naspers and Prosus to account for the added complexity that has been introduced through the large crossholding structure, irrespective of management’s efforts to convince investors otherwise.

For Zwelakhe Mnguni, CIO at Benguela Global, Naspers and Prosus trade at a discount to NAV for several reasons, and no amount of tinkering is going to change that. One reason is the complicated structure in which Naspers holds its stake in Tencent, which creates uncertainty on whether the full value of the stake could be realised. Another is that the latest share swap transaction adds another convoluted layer of shareholding between Prosus and Naspers. 

“There are also serious and valid market concerns on corporate governance at both companies,” Mnguni says. 

Of course,  the Chinese government’s crackdown on tech companies will also have a bearing on the share price. “Tencent is still, by far, the largest driver of value for both Naspers and Tencent and we are likely to see continued regulatory uncertainty in China and hence further volatility in the share prices in the short term,” adds van Cuyck.

Management, of course, remains optimistic: “The fundamentals of our businesses are strong and we will continue to invest in our core segments and ventures,” says Van Dijk. We have a robust pipeline and remain focused on taking the right actions to unlock value for our shareholders.” DM/BM