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Naspers spin-off Prosus has announced its intention to reduce its stake in Tencent by 2%, selling over 190 million shares in the process. To put the proposed sale into perspective, Prosus will raise over R200bn from the 2% sale of Tencent, which is being sold to investment banks Citigroup, Goldman Sachs and Morgan Stanley at a discount to Tencent’s share price. R200bn is approximately the same market capitalisation of Standard Bank, South Africa’s second largest lender. Both the Naspers and Prosus share prices
Prosus stake in Tencent will decrease from 30.9% to 28.9% following the sale and the company has committed to not selling any further shares for three years. This is the same commitment Naspers made in 2018, when it sold a 2% stake in Tencent. That commitment ended merely a fortnight ago and although the holding structure has changed substantially since Naspers unbundled Prosus in 2019, the investment holding company has been actively searching for ways to narrow the discount to its net asset value, which mainly comprises of its Tencent stake.
Chinese internet giant Tencent has been labelled as one of the best companies in the world currently, however, it has come under increased regulatory scrutiny by the Chinese government in recent months, raising speculation that Chinese authorities are concerned about the size and control that tech titans Alibaba and Tencent possess.
Naspers management have been actively attempting to narrow the discount in recent years with little success. Firstly, the unbundling of Prosus, failed to create any form of shareholder value. A $5bn share buyback program was introduced at the latter end of 2020 and is still ongoing but is yet to yield any material value as yet.
The latest corporate action will see the proceeds being used to fund ‘continued growth in its core business lines and emerging sectors, as well as allow for complementary acquisitions.’
An argument for Naspers operating at such a significant discount to net asset value is the poor capital allocation decisions related to the other investments in the stable. Most investments are still loss-making, combined with the fact that regulatory concerns persist in China and the complexity of the holding structure of Prosus and Naspers,
Ironically, Naspers and Prosus are both down following the announcement.
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