LONDON — Naspers has just ended its first New York Investor day where its executives went to tell the story of Africa’s most valuable business to the best heeled investors on earth. The prime reason was to address an abnormality where the stock price of the South African-headquartered business trades at a 38% discount to the value of its underlying assets. In this fascinating half hour of interaction, Naspers CEO Bob van Dijk fields questions fired at him by Wall Street’s finest, answering queries ranging from how he intends closing that abnormally high discount through to how the group handles capital allocation. Naspers has a market value of more than R1,500bn and a weighting that’s a touch above 20% in the JSE All Share Index, making it an anchor holding in every South African investment and retirement portfolio. – Alec Hogg
I’m from Morgan Stanley. Just on the last meeting is there a timeline that you have in mind as to how long you would wait before you decide that you’d exit that particular business? Also, in terms of the sectors that you are looking at for investments are there any particular sectors you are more focussed on and any sectors you would not be looking at, at all?
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I got the second part of your question but not the first part. Would you mind repeating that?
Yes, sure so, when you look at your businesses, which are currently loss making how much time do you give them before you decide that you need to exit?
So we look at it slightly differently and maybe its good to take a quick step back and how we run our capital allocation process because in the end, our capital allocation process is probably the most important thing we do. On an annual basis we basically ask each of our businesses, not only the new ones but also the existing businesses to submit a business plan. That business plan fundamentally says, this is the capital I require and this is the return I’m going to get you. These are the operational metrics that will tell you we’re delivering what we’re promising to you. Now, what we do during that business planning period is to make sure that we are happy with those returns. In some cases, it can take years so, for example I think margins initial classified business plan was about six years ago. That order of magnitude said, I’ll probably turn profitable in about six years. Then he submitted a set of interim metrics that we could track that will give us the comfort that he’s actually executing. In Martin’s case, we waited for six years because we realised he was building a great business but again, every month we check in with Martin to see if his delivery in line with his plan? Do we need to adjust the plan or do we need to rethink the IRR, or are we happy with the IRR? So, there’s no number of years as long as people deliver on plan and we are comfortable that we get a return, and we like sooner rather than later. Some of the best investments take some time to get to full fruition and as long as the IRRs are good, that’s fundamentally what we care about. That’s to your first question.
To your second question. If you look at how we have allocated capital and again, I won’t steal Basil’s thunder, is actually being quite focussed on our core segments and I don’t expect that to change. So, I think the capital we allocate in the next few years will, and it’s hard to speculate on future capital allocation, but we’ll prioritise the key areas we are in today and we’ll make smaller investments in other areas. We’re unlikely to go within the majority of investments into new areas.
Hi, Steve Sugary from Sainsbury Research. Thanks for coming to the States. I know you’ll tell us a little bit later on what you think the solutions might be for the discount but could you just talk a little bit about what the perceptions are in the market that lead us to this point? And some of the factors that the market thinks are the reasons for the discounts so not a solution but just how we got here.
So, the question is what is driving the discount up? There are a few factors in it and again, there’ll be many opinions, particularly here in this room, on what those different factors are. I’ll speak to the ones that are very clear. So our discount typically ran between 20 to 25% for quite a long time. When it really started changing was about 20 months ago, or somewhere around that timeframe, and what the main factor is, is that there were very significant capital outflows out of SA, between $15bn and $20bn that went out of the market mainly because investors see the country risk as relatively high, given the political turmoil. We are about 20% plus of the index, we’re the most liquid stock in the market so we see that outflow and we take a disproportionate share and that’s been particularly painful. I think some of our shareholders here will say, we also want to see your E-commerce businesses turn profitable. I think we’ve heard that message loud and clear, which is why it is one of our top priorities.
Good morning Bob. David from JPMorgan. We’re setting up this strategy here and looking at the key execution risks, when you’re coming up against a Facebook, Amazon, and a Google, and for that matter a SoftBank. They seemingly have a lot more money than you and a better ability to hire talent. Can you discuss both those points, i.e., to what extent is your strategic execution hinging on your ability to outspend and to hire the best talent in the industry?
Thanks that’s excellent questions. Maybe I’ll start with the second, our ability to hire talent. I must say that it’s been, in the 2.5 years that I’ve been in this role, I’ve never not hired anybody that I wanted to hire. I think what sets us apart is that senior people in our company are all entrepreneurs. They all run a business. We’re not a metrics company, we’re not a corporate company. That means that if you have a job in our company you actually have a job and you run a business that matters to us. When I’m thinking back to my own personal preference great talent typically, wants to have responsibility, ownership, and have their real shop and that’s something we do, I think better than just about any of the other companies that you’ve mentioned, and it’s also the kind of people we want, frankly. So, you don’t have to be a founder but we want everybody to be an entrepreneur and people get super excited about having responsibility. That’s the second part of your question.
The first part is an interesting one. I think the answer is actually quite different for the different companies you’ve mentioned. I think we compete with some in some markets and it usually works out well. I think again, Dick, probably needs to take an example so, let’s take Amazon a fierce competitor with Flipkart. If I look at the results that Flipkart has had in that market, given at how much Amazon has spent. I’m exceptionally proud of the quality of the engineering and the entrepreneurs there so, there, you don’t have to match Amazon Dollar for Dollar. You can actually still gain market share while they’re spending a ruthless amount of money. I’m very encouraged by that.
SoftBank is an entirely different matter right, an operator in the telecom space, but an investor in our space. I don’t want to speculate about their overall impact on the ecosystem. We’ve not actually, competed for deals with them so far. We are a great deal more selective right, we invest thesis driven or early stage. They invest broadly at later stage, and we might run into them in some spaces but we’re actually very happy that they invested with us in Flipkart recently but we haven’t competed for deals. They might push up overall evaluations, which would be annoying but again, we don’t deviate from our ‘why’ focus because of what they do.
Jason Kirschner from Emerging Sovereign Group. Some of the focussed verticals that you’ve highlighted, like classifieds, or food delivery or fintech, are all mostly micro payment types of businesses, high frequency transaction type of platforms. Are there others that fit that categorisation that you’re out there looking at, maybe something like ride-sharing or are there other types of things?
An excellent question. We like high frequency businesses. We think they have the potential, and I mentioned platform businesses but high frequency platforms are typically the most attractive ones. We’ve stayed away from ride-sharing. We probably missed a few investment opportunities that we just didn’t see the potential return from and we get proven wrong. What we prioritise in our investment process is that what we do invest in gets right, and again, Basil will show you a little bit more around our rate or aphelia, etc, which is relatively good, which also means you’re going to miss some. Food delivery is a high frequency case, which we’re actually really excited about. Again, I don’t want to steal Larry’s thunder but if you look at those businesses and where they are today, I think it’s going to be similar to the way we thought about e-Tel a decade ago. So, the potential is probably 10 to 50 acts of what it is today.
Hi, Bob. It’s Chris from UBS. Just a quick one, and apologies if its pedantic, but you mentioned at the outset that you add 77% of revenues online and you’ll be moving that to 100% in the near future. I’m just wondering what that means for the print and pay TV businesses, which clearly still have a very high portion of non-online revenues?
Sure, I think as I mentioned, there are two facts of the change and mix. If you look at our print business it’s actually not growing. It’s actually shrinking. If you look one level deeper at our print business, is you see within that, our Media 24 group, there are quite a few online businesses that are growing, 50, 60, 70%. I don’t believe anybody will read some newspapers five years from now. I don’t think anybody will watch linear television five or maybe ten years from now. Maybe sports is the exception so I think the timeframe for those businesses might be different but the end point is very clear. I think the way that I think about those businesses is also that transformation for them is probably even more urgent than for other businesses. If you don’t change, you’ll die, and the conversation that we have with those businesses are all around make sure that you don’t, in transformation to new technology, lose your relevance to customers.
Hi, Bob. It’s Mike from Citi. Just back to that IRR slide. The last couple of years have probably been particularly good for tech, hence it’s certainly helpful for your IRR over that period. If you go further back arguably, it’s been a little bit more hit and miss, and I was wondering what are the learnings, or what are the mistakes that were made if you take a longer look back over your history and that you probably would not, as you see it, repeat going forward? So, if the cycle turns down, hopefully Naspers is a relative outperformer.
The most important thing is don’t invest big in something you don’t understand. I think that’s something, if I look to all the bets that have occurred sometimes, and you’ll see a slide from Basil later, I think where we’ve lost money is when making a bigger bet before we had a true understanding of the business model, and I don’t think we’ve done that, at least not during my tender and I have no interest in doing that.
Following up on betting big. Has your investment strategy changed as your market cap has grown? Obviously, it’s wonderful to find Tencent-like investments that can compound at 62% over a decade, and if there are more of those, congratulations but can you continue to make 200 or smaller investments like Tencent? Or do you have to look for the ability to bet big in a business you understand, but to bet big in order to continue to move the market cap in a meaningful manner?
That’s an excellent question. I guess there’s two parts to that. One, do you have to change your investment perspective, and can you move the needle with investments of say, the smaller size? We like all our children equal and if we get 100 great investments of 100-million, we’re happy about those. I think we’ve shown in the past, of us being able to actually buy smaller assets, bring them together and build a fantastic business. That’s actually at the core of Martin’s story so I don’t think you necessarily have to do build $1bn deals to get scale, I think that’s one part of the answer. The other part of the answer is we’ve actually done some more chunky deals. So we’ve spent more than $1bn on acquiring majority veto. We’ve spent very sizeable amounts in food delivery with Delivery Hero recently. Partially because we realise and we do want to build a big business and even though I think those are still relatively early stages and we’ll end up writing a bigger cheque but I think that’s still the right thing to do.
Larry here, what do you do when you’re confronted with competing in a market where you’re playing against someone from Wall Street investors that don’t require, what I would call, an economic profit? I’m clearly, thinking about Amazon because my opinion, and it’s just my opinion, if you take out Amazon web services Amazon has really never shown an economic profit and it’s a non-Amazon web services business.
Again, a very strong question. I think Amazon is a fierce competitor. They have the willingness, ability others have, but the willingness to deploy capital, which they are very patient to see a return, if ever. We compete with Amazon really only in new markets and what I’ve been encouraged by is that if you take Flipkart, which is the company that is competing with them, has an exceptional engineering focus. It has the best engineers in India and I think if I look at what they’ve achieved with less money in the last year, it’s really about, and maybe the simplest way that I think about it is, if you have Amazon who are an extremely well capitalised, long-term company who is willing to deploy massive amounts of money but they are largely a US based company that has largely, US based engineers that have worked on many products. That get deployed in many markets. So, in India, Flipkart is an Indian company with Indian engineers that focusses on India only. It does nothing else and it has people that are all from India. So, very engineering focussed. Very local focussed and it’s proven to be a recipe to compete with a player like that. I would be very unhappy competing with Amazon’s core market though.
I wonder if you could clarify for us how the company thinks about, perhaps if we fast forward three, five, or six years from now, when many of your investments will obviously be mature. Tencent first and foremost, with perhaps classifieds, etc., when, if ever, will the company diverse, spinoff or separate itself from some of these businesses, which will become much larger and more mature, what’s the strategy?
Yes so, the strategy is actually quite simple. What we do, and we do it on a regular basis, we look at the return that we see we can get on holding onto an asset versus parting ways with it, and there we put a high bar. We are very pragmatic. If we see they’re going forward and we don’t believe we’re going to get a substantial return on holding onto an asset or we get a better return on consolidating, selling, doing an IPO then we’ll do it. An excellent example is our Allegro business. We sold that business for 3.2bn a bit over a year ago. It’s a great asset and the people who bought it are probably happy with it. For us, we saw excellent market conditions to get a high price for it. It was actually diluted for our growth and we didn’t think we were going to get a better return by holding onto it. So, we look at future return that we expect based on what we know with the market. If we don’t see the right picture then we’ll part ways.
Hi, I’m Ramon from Prince Street Capital. This is maybe a corollary to the previous question but how do you think about when the appropriate time is for the businesses to go public? I think if you look at it right now in the private market capital seems to be a pointer for companies who are able to achieve valuations that previously would have been only available to them when they go public. So, how do you think about when the appropriate timing for that is?
Yes, that’s a fair question. If you at our past, we’ve actually been very supportive of IPOs of our portfolio companies before and I think there will be potentially, other occasions in the future. I think it’s a trade off where companies are in their life stage and markets. If you want to make significant strategic moves that maybe cost money it’s much easier to do that if you are a private company. If you’re cash consuming in a significant way I think it’s generally better to be privately held rather than be a public market itself but there will be businesses that will fit the bill and we’ll be pragmatic about it. Another consideration is that if we don’t see the value of our businesses has crystallised in our share price over time, that might be a way to crystallise that value and we think about it regularly.
Which business do you think will be first to list in the stable that you have today?
I think that’s very hard to speculate on.
Bob, you’ve built a great investment record that anyone here in the room would happily trade you for but what was it, when you looked at the ride-sharing businesses that made you decide not to invest in it and what do you think of them today, and do you still think there’s an opportunity? A lot of people are still obviously, investing large amounts of money in this space. Is it something that is still on your radar screen but I’m interested in your thought process there and your view on the industry.
Yes, and you might think my process is somewhat inferior because we decided at some stage that we didn’t want to invest there. I haven’t been following this space in much detail since because I think by now it is too late to make a return, or the kind of return we would like to make on it, that’s my view. One of the considerations at the time was how defensible is a leadership position in ride-sharing so there’s a technology advantage that one may have? But the ability to sustain high margins in the face of competition is one that I never got personally excited about. We see it, and it proves not to be true.
John Kim from Deutsche Bank, two questions. I’d like you to just talk a little bit about what senior management and the board think about the sort of constraints you face, being domiciled on the JSE, and possibly about constraints for considerations around the super voting structure. So is there a scenario or what would need to be true to kind of rethink the (A) end shared dynamic, and the primarily listing on the JSE?
The primary listing actually, Basil will address and I won’t steal his thunder. The bottom line is to change it will be very difficult, but Basil can elaborate. It will be very difficult, to the point of impossible. To your other question, the dual share structure has been approved by shareholders and has been with us for a long time. Actually, of the maybe 500 to 600 shareholder meetings that I’ve done, it almost never comes up as a concern. We represent all our shareholders and it doesn’t seem to be a major issue for most of the people who invest in our shares. On the other hand, I think our ability to be a credible investor in markets like Russia and China, it does rest, at least partially, upon the inability for people to do a hostile takeover of our company. That has been true for the entire life of our company, and it’s still true today. We have time for two more questions, any pressing ones?
A broader question, which is just what do you thinks makes Naspers different from most other companies you’ve worked for and what elements do you think it has made it most successful? Then a narrower question on education technology, and what you’ve learnt from investing in that sector?
I think there’s probably two components that I think are quite different from our group, and the one I have mentioned earlier, which is everybody in the company is an entrepreneur. People have real jobs, they run real businesses, for example, if you take our e-Tell business in Romania, which Christina will speak about. Even though we own it, we have an exceptional founder that runs that business, who spend seven days a week, 20 hours a day, to make it into something better and we really make sure that we empower people in every job we have to run a business to success. As I said, we’re not a big company with big org structures, where people have to function in major roles. That’s not at all. Even though we’ve become big we’ve managed to avoid that and I think that’s special for us.
I think another thing that’s close to us is we spend a lot of time in aeroplanes. I travel about 80% of my time and I think the same is true for my entire team. That’s a relatively exhausting thing to do but it does teach you a whole lot about how different business models work in different places. What you can learn from that, is it applicable to other places? It allows you to see what good looks like and again, I think that’s really hard to do without being able to visit all of these companies, get deeply in with them in their operations and strategy. I think that makes us unusual.
Education technology, again, Larry will speak more about specific businesses and why we got excited in this sector. I don’t want to steal his thunder entirely so, if you don’t mind, he’s sitting right next to you actually, and he will probably be cross with me so, if you don’t mind, I’ll actually park that one for later because Larry will address it in his presentation. Okay, all right. I think we are about done. Again, if you have further questions, the last one there. We actually will come back later as well, but go ahead.
Thank you, it’s Patrick. With regards to management compensation can you tell us what you like about the current management compensation structure and what you don’t like about it? Then what investor criticisms do you think are fair versus unfair?
So, there are three things that I think are good about our com structure and I call out one that I think we have to do better with. We pay for performance, and that is a first principle of what we do. The second key principle is around we don’t want people to make money when our shareholders don’t make money. We can debate on whether the vehicles are ideal for it but that’s a key principle of what we do. The third principle is for us to have somebody’s compensation be tied to the business he or she actually works in. There we have quite a unique structure so, we create share appreciation rights for a business that people actually manage. For example, Laurent, who sits right in front of me, has the majority of his incentives in the success of PayU, and not in the success of the Group, and we think that’s the right thing to do.
I think what we can do substantially better is this clause around our compensation structure. I think our disclosure is compliant but I think there’s definitely a step-up we can do, to make it more inciteful for our shareholders. Again, I want to make sure we give plenty for the other segments. If you’ve got more questions on that topic then please also ask them at the end, when we can ask our chief people officer, Eileen, further questions -she would love to answer them. All right, with that, I’m going to go off stage for now. We’re going to show a brief video about Martin’s business.
