Shareholders really don’t have a say – Delphine Govender on Naspers

A number of South Africa’s top asset managers recently teamed together against the complex shareholding structure and lack of management alignment in South Africa’s two largest businesses – Naspers and Prosus. The Naspers executive team, led by chief executive Bob van Dijk, has been under scrutiny by market participants for a number of years. The discount in its share price to its investment in Chinese tech titan Tencent has widened following a number of unsuccessful corporate actions. Star asset manager Delphine Govender joined the BizNews Power Hour to give her view of the situation as a steward of shareholder funds. “It does feel as though management are very well aware that the shareholders, the outside shareholders, or the minorities as they tend to refer to, [they] have little in terms of actual rights.” – Claire Badenhorst 

Delphine Govender on what has been happening with Naspers:

I guess the reality is that there’s a fantastic asset inside the Naspers/Prosus corporate structure called Tencent, and it’s delivered phenomenal returns to owners of that asset around the world for the last 20 years, effectively since Naspers bought Tencent. But the structures through which those returns are accessed have become quite convoluted and complicated, to the point where – as we sit here today in 2021 – the Naspers entity trades at a significant discount to its ownership in Tencent – the underlying asset, which is obviously the Chinese-listed company – and now we own that through Prosus, which is a new entity that was installed just over two years ago. So Prosus owns Tencent, Naspers owns 72% of Prosus and Prosus trades at a discount to its ownership in Tencent and Naspers trades at a further discount to its ownership, both in Prosus and then effectively in Tencent.

So the question that has been plaguing shareholders has been why these discounts continue to exist and what management’s intentions are and actions are to assist in the unlock. Now, we’ve got quite a few reasons for why we think they exist, but if we had to just locate the concerns to this specific transaction. So in May this year, Naspers and Prosus management came out with a transaction that they basically said, currently, remember, Naspers owns about 73% of Prosus, Prosus is listed on the international stock market, Naspers is listed in South Africa and it has a very wide public shareholding. Effectively, what the transaction was, was that Prosus would make an offer to buy 45% of Naspers’s shares such that the eventual outcome would be that Naspers’s public shareholding would reduce to about 50% versus the 96%. The rationale was that Naspers’s weight in South Africa on the JSE would reduce and then Naspers’s stake in Prosus reduces from around the 73% level to around 57%. But in order to achieve that there would now be a cross-shareholding where Naspers owns 57% of Prosus and Prosus owns about 50% of Naspers. So the reason for the transaction is to reduce the significant weight Naspers has in the South African market but the effect of it is also that it really, as I’ve explained, increases complexity.

From a shareholder’s point of view, we’re just trying to understand how do we unlock the current 50-odd percent discount. Naspers currently trades at a 50% discount to its underlying investments, and we cannot see how this transaction serves to sustainably unlock that discount. Several shareholders are all perplexed as to why this transaction would be put on the table to advance the overall big picture, which is to unlock the discounts that exist. The problem we have is that the way the transaction is set up is that only the shareholders and Prosus actually need to vote to approve the transaction. And because, as I mentioned, Naspers is by far the biggest shareholder in Prosus, and Naspers, as you would know, historically has a high voting structure. So the economic ownership in Naspers of shareholders does not correspond to the votes. Effectively, the Prosus transaction is a fait accompli because Naspers will just vote in favour of the transaction because of the related parties. And the only thing that shareholders have in Naspers is, if you don’t think that the ratio at which you are getting some Prosus in exchange for your Naspers – shareholders don’t believe it’s a fair ratio because Naspers is trading at a far bigger discount to its underlying NAV compared to what Prosus is. So you’re swapping something that’s trading at a 50% discount for something that’s trading effectively at a 35% discount, so you are losing some of that unlock that you might have been holding Naspers for.

On what shareholders can do: 

The last point is that the only real thing that Naspers shareholders have is that they could effectively not tender their shares. It’s voluntary. So you can choose not to tender your shares – your 45 of your 100 shares that you own. If that doesn’t happen, then effectively this transaction doesn’t go through. Now, obviously there are insiders – they are insiders in Naspers who want the transaction to go through, so we would expect them to tender their shares – but there are enough shareholders outside that might not want to. There’s a phenomenon here, though, which I’m sure Naspers management are aware of, which is basically what we would call a prisoner’s dilemma if you’re a Naspers shareholder. It’s only going to work for you if everyone decides not to tender their shares, but if everyone tenders their shares and you decide to take a stance and say, this is wrong, I’m not tendering my shares, you actually end up being worse off as the shareholder who holds the 100 and doesn’t tend the 45. The only thing that you would really have going for you is if all the shareholders that were dissatisfied all said they weren’t tendering their shares actually did not.

Each investor will have to decide for themselves what they do. But as I’ve explained, when it comes down to the final analysis, I think management themselves know that each investor faces this prisoner’s dilemma. So it’s a tricky situation. What I found quite interesting, as I saw subsequent to the events of last week, and bear in mind that management, the Naspers board, the Prosus boards – they’re all aware of the situation. Hardly any of this is news to them, I think, and therefore they understand how the balance of power works. So right now, opposition to the transaction have few routes they can go – obviously voice collective opposition, voicing your concerns and hoping that that would at least land from a sense that the boards of Naspers and Prosus are prevailing over worsening governance, and in an era that we live in today, one would think that that should not be acceptable, particularly for the non-execs to want to permit and perpetuate.

I see that Naspers management have mentioned today in one of the articles I read that they’ve had over 300 to 400 individual shareholder engagements in the last couple of weeks to address opposition and that after those engagements, people left understanding. So that’s a bit perplexing to me. That’s unheard of, that you would need to have that many engagements and why whatever they’re saying can’t be said publicly. What is it that we’re all missing that level of engagement is necessary and then suddenly concerns are laid – according to management.

In any other normal investment, shareholders would be able to vote, not just with their feet in terms of selling and exiting an investment, but actually vote. If you were not happy with the situation, you could vote off a director – your vote meant something. But in this structure, because the high voting shares sit in certain of the Naspers class of shares and the shares that all of us own are the N-shares which do not have the same level of vote, we can’t really do anything when it comes to voting. And then obviously with this control structure that Naspers owns Prosus, one can’t do anything there either. Now technically, one would think that Naspers should not be allowed to vote its shares because it’s a related party in the process transaction, but that’s not the case. So it does feel as though management are very well aware that the shareholders, the outside shareholders, or the minorities as they tend to refer to, [they] have little in terms of actual rights.

On Naspers agreeing that it’s a complex deal:

[They said] that it was complex in the way it’s put together, but it’s not complex in its outcome. So too bad, it’s complex. It’s much more than the complexity. That’s why we always have to go back to the first principles. The first principle is, there’s a big discount that these businesses trade at. There are lots of reasons for why we believe that discount exists. We do not subscribe to the view that the discount exists for the reasons management advance, which is the hype, the heavy weight that Naspers has in the JSE. It’s contentious – the reasons advanced. And then secondly, we think the transaction does little to actually guarantee this so-called immediate value unlock or even any future sustainable value unlock. It can’t simply be that a whole host of people are missing something that could be that plain to see.

On why Naspers seems indifferent to how minority shareholders view this transaction:

I think they would say they care, which is why they had had the three to four hundred investor meetings. It’s largely because they’ve prevailed over an investment in an asset, well particularly the chairman, Koos Bekker, who did brilliantly to invest in this asset at a very low price – turned out to be one of the best investments around the world. Subsequently, the Naspers and Prosus structure is trying to set itself up to effectively be that venture capital fund that repeats the Tencent stupendous success. Up to this point, we haven’t seen any evidence of it and we haven’t really seen the evidence of the value from sitting on the board of Tencent actually flowing through to the sort of deal flow that one would have thought could have flowed. And so what you find is that you’ve got a management team or a chair that’s managed to grow savings by virtue of this investment in Tencent and perhaps feels now that track record should speak for itself. But the reality is that there is massive leakage because all of that profit, all of those dividends that are coming from Tencent aren’t being invested in what we call the rump of assets that are actually, frankly, losing money. This is where the management alignment is unclear – management are still primarily aligned to performance that includes the performance of Tencent and Tencent drowns out everything. And so if management were much more aligned to their underlying actions, which was the non-Tencent assets, I think we would find a very different outcome.

On what can happen in the long term: 

Ultimately, I think it gets to a point where a shareholder has to decide, is walking this journey with this company, given the way they take care of shareholders, given the way they make decisions about governance, is this a journey I want to continue on? Active managers such as ourselves can decide at some point, I don’t have a high level of confidence that continuing this journey is going to really result in that value unlock because I have to purchase a share alongside many of these other governance, kind of this murky governance, and I’m going to require a discount. So maybe the irony is that I invest because there’s a discount to a great asset, but actually the probability of that discount unlocking, given what I have to co-invest with in terms of the agreements and the transactions and the lack of control probably justifies the discount, ironically, and perhaps there’s better investments in the market that are available.

We’re just unfortunate in South Africa that we have a very small market, so you end up having an asset that kind of crowds out everything else. And unfortunately, that’s what clients look at. They look at the performance of the benchmark with these few species dominating. We are responsible investors and we’re stewards and if anything, we’ve learned from the experiences of the last several years that it really has to be about having an ability to look your clients in the eye and say, this is the reason I was willing to continue. And then at which point no more.

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