Naspers’ failed “closing discount” strategy hits fresh nadir – Piet Viljoen wades in

Two years after Naspers management began implementing an explicit ‘closing discount to NAV’ strategy, the consequence has been the precise opposite of what was intended. Counterpoint’s Piet Viljoen points out the stock’s discount to its see-through asset value is now at an all-time high of 62%. Naspers accounts for a sizeable chunk of the JSE indices, so failure of this deliberate strategy has cost South African savers dearly. Bills for the company’s expensive creation of the offshore holding company, Prosus – coupled with a massive share buyback programme at much higher levels than the current share price – run into hundreds of millions of dollars. Viljoen expressed his concerns in a tweet this morning. In this podcast, BizNews editor Alec Hogg asked him why he felt strongly enough to express his criticism so publicly.

On Naspers share price to reflect the value of its underlying assets

At the time, there was no Prosus, only Naspers and they held a stake of just over 30% in Tencent and some other investments. If you added up the value of the Tencent investment and the other investments, it was well in excess of the Naspers share price. In other words, Naspers was trading at a discount to the sum of its underlying parts, including a significant loan in Tencent. The discount at that time, if I remember correctly, was in the region of 30%. So I think management came out and said their priority over the next few years was to close the discount.

On investment bankers benefiting from Naspers’ share price

Investment bankers have benefited tremendously from it. To create a new holding company in an offshore jurisdiction, transfer a lot of the assets to that company and then create intercompany investments across shareholdings is a very expensive exercise. As soon as you start employing investment bankers, legal people and so on to create these structures, it costs you a lot of money. It has cost Naspers shareholders a bomb to do this. It hasn’t been a cheap exercise at all.

On Naspers to unbundle Tencent 

It is easy to sit on the outside and criticise. It’s much harder to sit inside and do these things. However, if you look at it rationally, the easiest way to close a discount is to unbundle Tencent to shareholders and manage the rest of the investments to the best of their ability. Then shareholders get the full value of Tencent because at the moment, if you look at the market value of Naspers, it’s less than its investment in Tencent. If they unbundle Tencent, you already have more than you own today, plus you have all of these other investments on top of that still left in the portfolio. The clear thing to do would be to unbundle Tencent. Of course, there are all sorts of reasons why they cannot do that. There might be some claws in the shoulders agreement, which prevents them from doing that. There might be some off the record agreements with the Chinese authorities why they can’t do that. I can only speculate about why they haven’t done so because that is the easiest and cheapest way to unlock the discount.

On the management of Prosus not being aligned with term interests of shareholders

Incentives drive behaviour, even for very smart people. And the incentives of Prosus management – because I think that is where the management sits – are not aligned with the long-term interests of shareholders. It is all revenue and transaction-driven incentives, and it’s not return on capital, discount to nav. The discount to nav isn’t even one of their incentives. The incentives and management are all very different to the outcomes that would be positive for shareholders.

On niche strategy investing

The market is as they say about the law system: the wheels of justice grind slowly, but they grind finely. Over time, the market picks up on this and Coronation’s assets under management came out yesterday and they are down significantly. So, the market is picking up on it and investors are examining two alternatives. If you like the index – Naspers and Prosus are not a large part of the index anymore because they have declined so much – you can go to an index fund instead of being with a large fund manager. Being charged active fees, you can pay a lot less fees and buy the index and get a very similar outcome. Then you can add to that or some alpha around that buy, investing in niche strategies, which the large fund manager cannot follow because the assets are so large. There are many niche strategies out there that can add value to large funds if you put them together in the appropriate way.

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