The Naspers discount and what needs to happen – Arnie Witkin

In this thought-provoking piece, BizNews community member Arnie Witkin gives commentary on Naspers. The Cape Town based multinational is, as he writes, the most successful company ever to be listed on the JSE. Naspers, which owns a third of Tencent, has been struggling to unlock value for shareholders – without cashing out on what is undoubtedly their most successful investment. According to the CEO of Prosus, Bob van Dijk, the company is acting in the interest of the shareholder by retaining the company’s stake in Tencent. Below, Witkin uses a personal example to illustrate the potential for Naspers to grow, while serving the best interests of the shareholders. – Jarryd Neves

The Naspers Discount

By Arnie Witkin*

Firstly Koos Bekker and his team must be congratulated for creating the most successful company on the JSE of all time. They are owed an almighty debt of gratitude from all South Africans.

However, the question now is, ‘Are they acting in the best interests of shareholders?’ In a recent interview, Bob van Dijk, the CEO stated that it had been in the best interests of shareholders to retain the company’s stake in Tencent. From one point of view that may be correct. But from a purely financial point of view it is debatable. It is irrefutable that if the Tencent holding was unbundled from day 1, or from the first day of listing or any time thereafter shareholders would have been twice as better off as today, subject to potential tax considerations.

The genius was in taking the stake in the first place.

I unbundled New Bernica in 1989 when our shares traded at a discount of between 10% and, on a very bad day after the 1987 crash, 40%. New Bernica took minority stakes in private companies with the intention of listing at some time in the future. In 1988, 90% of our portfolio was listed and the shares started trading at a discount. My chairman, Ken Whyte, and I agreed that the market didn’t need us to hold shares in listed companies for them. Even if we had a rights issue to double the size of the company, around 50% would still be listed. It was time to go on to the next thing. The shareholders received full value.

The way we did it was to frame the distribution as a reduction of the share premium account. In other words, we were returning capital to the shareholders. Clearly the value of the shares was far greater than the share premium account, so we attributed the cost price of the unbundled shares to the shareholders. In their books they showed the cost of say JD Group at the time as R1 per share when the shares were trading at say R3.00. For tax purposes, if they paid tax on their share dealings when they sold the shares they would show the cost as R1. 

Clearly Naspers has looked at the unbundling option from every angle, but I don’t think they have considered the share premium account route. There may be a tax implication if the shares are unbundled as a dividend, This might partly explain the discount. I am not aware if management has explained why they don’t unbundle other than they believe that, in their opinion, it is best that the Tencent shares stay in the structure.

There may be a desire on the part of the authorities to keep the Tencent shares in the exchange control and tax nets. The solution to that is to list the unbundled Tencent shares in the form of a ‘South African Depositary Receipt,’ similar to the ADRs listed in New York. South Africans could trade the SADRs but couldn’t buy Tencent shares on the Chinese market. Foreigners could buy the SADRs thereby reducing the pool. That way money would flow into the country. South Africans would have a direct holding in an offshore asset without any money leaving the country.

Shareholders will receive full value.

This begs the question of what happens with the remaining assets in Naspers. Management needs to find another Tencent!

Tencent would have to agree to the listing of the SADRs. Would they be disadvantaged? Offshore investors could purchase the SADRs and they would revert to ordinary shares listed on the Chinese market. 

The South Africans couldn’t sell the shares in China, so there won’t be a massive dumping of shares. If the SADR’s trade at a discount to the price in China, the arbitrage gap would be closed quickly. If the SADRs traded at a premium, it would make no difference to the Chinese shareholders because they couldn’t sell in South Africa.

Bottom line

  • The Naspers/Prosus shareholders do not need the company to hold shares in Tencent for them. Naspers doesn’t add that much value to Tencent.
  • The Naspers/Prosus shareholders will significantly increase their value
  • Even Don Bradman had to retire at some point

What needs to happen

  • Naspers needs to consult accountants and lawyers as to whether the scheme is doable and the accounting treatment thereof.
  • If it is, Naspers needs to agree the scheme with Tencent.
  • Approval will be needed from SARS that the distribution won’t be treated as a dividend.
  • Approval will be needed from exchange control and perhaps the ministry of finance.
  • The listing will have to be approved by the JSE.

There is a treasure chest in the sitting room waiting to be opened. The proposed share swop with Prosus moves the chest to the dining room.

Koos Bekker and Bob van Dijk will have a much smaller empire, but will be much richer. They will still have a significant company to run. They need to find another Tencent.

  • Arnie Witkin is a member of the BizNews community who spends his time between Cape Town and London.

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